I'd answered a similar question a little while back, so I've modified that answer for you. Here's the link to my original post: http://www.trulia.com/voices/Home_Buying/Do_lease_rent_to_ow
Lease-options/rent-to-owns are not scams. They are not shady. They exist. They work. In many situations, they're win-win situations for both the tenant-buyer and the homeowner/seller. I wouldn't say there are "catches," but there are situations in which they're appropriate and situations in which they're not. So the "catch" pretty much is: Make sure it's the right solution for you.
A little bit about lease-options: They work well when someone (a tenant-buyer) wants to purchase but is unable to. Often the problem is weak credit. Sometimes it's lack of a down payment. A lease-option allows the tenant-buyer to find a home, control it, and lease it for a predetermined time (often 2-4 years). The option portion gives the TB the right (but not the obligation) to purchase the home. Depending on how the option is written, the TB may have the right to purchase at any point during the option period, or maybe only at the end. Usually, the option specifies an exact purchase price, but sometimes it may specify an exact way of determining the purchase price when the option is exercised. Often--though it's always negotiable--the TB pays an upfront option fee that's credited toward the purchase price IF the TB exercises the option to purchase. And often a portion of the rent you pay is also credited to the purchase price.
The couple-year time period gives the TB the ability to clean up his/her credit. It also helps the TB reduce the purchase obligation, since a portion of each month's rent is being credited to the purchase. And if the TB doesn't like the home, then at the end of the lease he/she can just walk away.
Most agents don't understand lease-options, as you can see from the comments on my earlier posting. I'll restate a few here (what some would consider "catches") and give you the answer.
To give just a few examples: "In this kind of market lease options are far and few between."
That's bull, to put it politely. In this kind of market, there are more lease-options than you could possibly imagine. And that applies nearly everywhere in the country.
I wrote a blog on how to find lease-options, which gives a lot of ways to locate them: http://www.trulia.com/blog/don_tepper/2010/03/how_you_can_fi Believe me, they're out there.
Another comment from the earlier thread: "You would have to put up Option Money, let's say approx. $10-15K and if you don't option the purchase you could lose that money." The amount of the option fee is negotiable. Often it's around 2%-4% of the purchase price of the property. But I've lease-optioned property without paying a penny. (For those of you wondering what the "consideration" was, the consideration was the $17,000 lease I signed.) And yes, usually you forfeit the option fee if you don't exercise the option. So, some people would consider that a "catch." But the point is that you've received something of real value for your option fee: The right to purchase a property at some point in the future for a set price.
Another comment from the earlier thread: "If the property value goes down over the next year, you'll have to renegotiate you purchase price and it may be with the bank." I'm not sure what that means. If the property value goes down, you're in the driver's seat. You can let the lease expire and just walk away. You're not forced to buy the property. Now, if you want to buy the property, you renegotiate with the owner. The bank has nothing to do with it, unless the property's been foreclosed upon. In that case, your option is worthless and you have no more right to purchase anyway. But there are ways to protect yourself if there's a concern about foreclosure.
Bottom line: Lease options aren't for everyone. But they're great for people who need them, and they're great for owners with vacant properties or properties they've been unable to sell. (In today's market, that covers quite a few owners.)
So, yes, they're legitimate. If you're interested in pursing it further, make sure the Realtor you use knows, understands, and is comfortable with lease-options.
Hope that helps.
There are already some very good answers to your question here so I will only add a comment about "legit" rentals. Be aware that there is an ongoing scam on Craigs list regarding "rental" properties that are not. Scammers are picking up property information on legitimate homes for sale and than peddling these listings as "rentals" with the scammers email address. You respond by email, give them your deposit and show up at the home only to find out it is for sale, not for rent. The scammer gets your deposit and you get taken. If you see a "rental" on Craig's list, call and speak directly to the listing agent to make sure the rental is legit.
I recommend you use a REALTOR or a real estate attorney for the transaction just to make sure you have someone who is looking out for your interests on the contract. Good luck!
OneTrust Real Estate
This is a good and bad way to buy a property. For buyers it allows them to learn about a home without buying it first, allows financial flexibility for buyers and sellers, and guarentees a genersous revenue stream and price for sellers. The "problems" with these transactions is that most agents don't know how to handle them properly and if they are not done right, mistakes are ususally to the benefit of sellers. In my opinion they are usually bad deals for buyers.
The biggest problem with these rent-to-own is that the buyer does not have an enforceable sales contract at the time they execute the lease. Event though a price is set and terms are fixed on the lease, agents typically forget to do a sales contract believing that they are not necessary until the time of purchase. This is an expensive mistake. If there is no sales contract at best the buyer can close with a good honest seller, at worst the seller can take the property back and sell it at the market price.
Lets say that the rent to own property is 300k buy in 5 years where the tenant/buyer will recieve a credit of $250 per month rent credit. Now if the price on the property goes down, then what? Does the price go down too? (In most cases no.) What about the $250 rent credit? (no refunds.) What about if the buyer wants to buy sooner? (Usually ok.) Some of this is addressed in well written contracts with a purchase agreement.
If there is no purchase agreement and the price of the property goes up, the sellers can lawyer up and cancel the contract.
If you do this or know someonw who is thinking about doing this. Please consult an attorney before signing any contact.
For a list of lease with option to purchase properties please contact me at 951-315-3201. I can help.
Allison James Estates & Homes
Work with a licensed Realtor - he/she will be able to help you to figure out which properties would be most likely to be good deals and will be able to provide you with representation when negotiating the contract.
Best of luck,
Are you willing to tender $10K plus as a down payment towards lease own purchase?
Most lease option purchase the tenant / buyer has credit issues EVEN if you were lease a property in most instances if credit is below 620 would be double to triple deposits.
The terms and conditons if you "tendered $10K or more" if you default property owner KEEPS your money.
Best lease clear your credit then apply for a loan
Lynn911 Dallas Realtor & Consultant, Loan Officer, Credit Repair Advisor
The Michael Group - Dallas Business Journal Top Ranked Realtors
I never saw a listing posted as rent to own , but we do have rent w/ option to buy listings & a lease purchase listings. Rent with option means you are a tenant & if the owner decides to sell you have the 1st option to buy it before they put it up for sale. Lease purchase means you are renting it now but agreeing to but it at a later date specified in the lease & you & the owner have agreed to a sales price from the inception of the lease.
Sometimes you can have a portion of the money from your rent applied toward the down payment, but more times than not they don't agree to that. In reality you can save the extra money yourself in your bank & apply it towards the down payment at the end of the lease, much easier approach.
The best thing to do is to get into a very affordable apartment one that is well under what you can afford and put the money into a savings account. FHA loans still provide low downpayments and seller assistance.
Find a good loan officer at a bank and start a program of saving