Keller Williams Realty
Real Estate Consultant
3xUS Army Veteran
Rent To Own is a better deal for the Seller than it would ever be for a potential Buyer.
The basic concept is finding a way to "force" savings towards a down payment by including a portion of the monthly rental that goes towards that savings. You pay your rent every month and your Landlord deducts a pre-determined amount to hold in a special bank account, called an "escrow" account. Your Landlord holds that money until you have saved up enough---through this "forced-savings" method---to meet a down payment to purchase the home.
The terms of the purchase price, including the down payment amount, and the amount to be set aside from the rental for down payment, are all set down at the time of lease signing.
It's all about helping the renter/tenant save up enough money for a down payment to buy a home (in this case, the one you're renting). But this is a better deal for the Seller because he gets to lock in a purchase price and a buyer today for a future sale.
Saving money for a down payment? Well, heck, you can do that on your own.
If you are dedicated to the idea of buying your own home, you can create your own savings plan to save up enough money for a down payment. And when you have saved up enough for a down payment, if that takes a year or two or more, YOU get to decide on the price you're willing to pay for the house at that time based on current market conditions. You won't be locked in to a price that may be a lot higher than what the house is worth in the future.
With Rent To Own you'll be locked in both to the house and to the price, even if it takes you 3 years to save enough through the forced savings of the rent payments. What happens if three years from now your life situation has changed? Maybe you need a bigger/smaller home. Maybe your employment has relocated. Maybe your credit or income is insufficient to qualify for a mortgage loan.
Find a way to save up on your own; not with Rent To Own.
Sit down with a local Mortgage Banker and get yourself prequalified, too. You may find you're better qualified than you think you are, and, if you're not, at least you'll know how much loan your income and credit qualify you for, and how much you have to save towards down payment and closing costs.
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Beyond that: If you can get in a position to actually buy--acceptable credit, a downpayment, and so on--within 6-9 months--it's better to wait. I'm a big advocate of lease-options in the right circumstances. But if you're really close to qualifying for a loan, then wait.
To address your primary question: Are they safe? Answer: Yes, if constructed properly. You really should have a lawyer protecting your interests. Keep in mind that only an estimated 30%-40% of lease-options ever actually result in a purchase. Usually, that's due to the tenant-buyer: he/she changes his mind, doesn't clean his credit up as he needed to, moves out of state, and so on. Very few actually fail because of the owner/seller's actions.
But back to protecting yourself. Again, check with a lawyer. But, for instance, you want to make sure that the owner can't sell the property out from under you. The strategy for you is to "cloud the title" with a filing in your local courthouse, either with the actual option or, preferably, with a notice of option.
Although prices are going up now, you want to protect yourself in case the property doesn't appraise for the full amount. There are lots of ways to do this. You might write into the original option that it can be extended if the property doesn't appraise. Or that the price will be reduced to the appraisal amount.
You want to make sure that the owner keeps making payments so that the property doesn't go into foreclosure. There are several ways to do this--but you need to choose one of them.
You can accomplish something quite similar to a lease-option using a landtrust. There's a lot more paperwork, but it's a lot safer. And, properly constructed, landtrusts are OK in Texas.
Here's a link to a blog I wrote on how to find lease-options/rent-to-own properties: http://bit.ly/findaleaseoption
Hope that helps.