Rental Basics in Temecula>Question Details

Andrew, Other/Just Looking in Vista, CA

How legit are these rent-to-own properties listed for rent? What's the catch? Thanks.

Asked by Andrew, Vista, CA Thu Apr 8, 2010

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I don't know which listings you're looking at, so I can't comment specifically on them. But I can comment on the concept of rent-to-own and lease-options.

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.
3 votes Thank Flag Link Thu Apr 8, 2010
Don Tepper, Real Estate Pro in Fairfax, VA
MVP'08
Contact
Hello Andrew

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.

Dale
2 votes Thank Flag Link Tue Apr 13, 2010
The best way to avoid this is to go to the county website and look up the address on the tax assessors website.. If the name the taxes are billed in is not the same name of the person saying they're renting the house, then it's a scam...Also, the "owner" will usually have some extensive excuse about why they are not in the state... Almost always a scam.. Most people that live out of state will just hire a property management company...
Flag Tue May 13, 2014
There's no catch. You can set up a land contract with someone who owns their home free and clear. The seller just acts like a bank would and instead of paying the bank your monthly mortgage you pay the seller. This is a great option for people with bad or no credit who can't get approval for a loan through a traditional mortgage lender.

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!

Joe Roraff
OneTrust Real Estate
http://www.LaCrossesRealEstate.com
1 vote Thank Flag Link Sat Apr 12, 2014
Andrew,

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.
Web Reference: http://bob2sell.com
1 vote Thank Flag Link Fri Apr 9, 2010
I found a lot of these on craigslist and when I called they wanted $199 to make sure title is clear and when I said I can't afford that right now and that I will call later, the so called agent hung up on me. The number they list is 510-256-3090. Either a fraud or just a total jerk.
0 votes Thank Flag Link Sat Apr 12, 2014
Fraud
Flag Sat Apr 12, 2014
Lease with option to purchases are great alternatives for someone with less than perfect credit, wants to have the stability of homeownership, is working on re-establishing their credit and wants to take advantage of the present real estate market. Typically the terms are a large deposit amount. Anywhere from $10K to $20K. Depending on the deposit amount which is held in an escrow account, the monthly payments would be made and a portion of the monthly payments would be added to your initial deposit. This helps the homeowner build a little nest egg, so-to speak ~~all the while repairing their credit. Sometimes the owner of the property will include maintenance with the monthly payment. At the end of the term ~~which would depend on the initial arrangement~~~would qualify for a traditional mortgage. Sometimes the terms can be renegotiated if at the end of the term the buyer still cannot qualify.
For a list of lease with option to purchase properties please contact me at 951-315-3201. I can help.

Sherry Kotvis
Allison James Estates & Homes
team@sherrykhomes.com
0 votes Thank Flag Link Wed Aug 22, 2012
Dear Andrew,

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,

Maureen
0 votes Thank Flag Link Thu Jul 8, 2010
Most people are under a "great myth" lease to own properties.

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
972-699-9111
Web Reference: http://www.lynn911.com
0 votes Thank Flag Link Tue Apr 13, 2010
There are some things you need to consider. If you plan on financing the home, the lender will typically only allow the portion of the rent above fair market rent to be credited to you. The documentation of the rental payment and "rent-to-own" agreement is also important. Check with your mortgage broker for more details to make sure that you're at least complying with current rules.
0 votes Thank Flag Link Tue Apr 13, 2010
Hi Andrew
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.
0 votes Thank Flag Link Tue Apr 13, 2010
Many are legit and are a good way for the renter/buyer to build up equity in a home by paying rent and some extra to build up the equity they need. I've found that the renters don't go through with it or the landlord doesn't put the money back into an escrow and then gets into financial trouble and files bankruptcy.

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

Gary
0 votes Thank Flag Link Tue Apr 13, 2010
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