How does rent to own work?

Asked by Maryann, New York, NY Fri May 17, 2013

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Ron Thomas, Agent, Fresno, CA
Fri May 17, 2013
You are desperate!
Your Credit or Finances, or both, will not allow you to go the conventional route:
You need the Seller to help you out!

The Seller will know it, and you are going to pay dearly for this service:
There aren't too many altruistic Sellers out there.

There is no FORM printed by anyone; there are just too many variables.
The terms that can be written into a Lease/Option can be dangerous to you:
How long is the Option period?
How much money are you putting in to the Option?
What happens if you are not able to execute the Option?
How do you know what your financial situation will be 2-5 years from now?
How much is the rent in the meantime?
Who will be responsible for maintenance and repair in the meantime?
What will be the Market Value of the home in 2-5 years?
What will be the Selling price 2-5 years from now?

This is the Ultimate Caveat Emptor!
2 votes
Anna M Brocco, Agent, Williston Park, NY
Fri May 17, 2013
Rent to own is similar to a car lease; keep in mind that it can be risky and one could stand to lose a bit of money, therefore do inform yourself well, and consider consulting with an attorney who specializes in real estate beforehand. If you haven't done so yet, visit with any licensed loan officer, see if you can buy outright...
2 votes
Trevor Curran, Mortgage Broker Or Lender, Great Neck, NY
Mon May 20, 2013
Good afternoon Maryann,

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.

Trevor Curran
NMLS #40140
Mobile: 516-582-9181
Office: 516-829-2900
Fax: 516-829-2944
PowerHouse Solutions, Inc.
1010 Northern Blvd. Suite 234
Great Neck NY 11021
Licensed Mortgage Banker – NYS Dept. of Financial Services

*If you thought my answer was helpful, please give me a “Thumbs Up” or “Best Answer.” Thanks!
1 vote
Christopher…, Agent, Tarrytown, NY
Fri May 17, 2013
These deals typically favor the seller and you could lose a lot of money in the process. They can be structured a few different ways, an attorney should review your agreement. In other words, don't do it.
1 vote
Joseph Runfo…, Agent, Staten Island, NY
Fri Sep 5, 2014
Rent to buy may also be called Lease to Buy; Renters pay a certain amount each month to live in the house, and at the end of an agreed upon period they have the option to buy the house. Each month of rent they pay is income for the seller, while a portion of it goes toward a down payment to eventually buy the home. Be aware that many contracts in rent-to-buy situations disallow late rental payments from counting toward an eventual sale. People with on time payment issues might lose equity when making late payments. Before you enter into this sort of arrangement talk long and hard with your real estate attorney, consider all the liabilities, and have a complete understanding of what's involved. Rent to buy can be helpful, but shouldn't be entered into by anyone who isn't serious about eventually buying the home, otherwise it will end up costing you more money in fees, and above-market rent payments.
0 votes
Josh Barnett, Agent, Chandler, OK
Tue May 21, 2013
Buyer/tenant places large down payment, acts like a tenant until they exercise the purchase option or the lease expires.
0 votes
Michele Port…, Agent, New York, NY
Tue May 21, 2013
Rent to buy is quite unusual in New York. You would be better off setting up a savings account to save for the downpayment.
Michele Portnof
Senior Associate Broker
0 votes
Mack McCoy, Agent, Seattle, WA
Sun May 19, 2013
Usually, to the seller's advantage.

The seller gets an upfront option deposit and increased monthly rent; the buyer gets an option to buy . . . but when the time comes, they still may not be able to buy. In the meantime, the Seller may have stopped paying the mortgage or lost the property to bankruptcy. Or, just as commonly, a Major Repair has come up and the Seller isn't as interested as the "buyer" in making a quality repair.

If you are a seller, my advice to you is to price the home at fair market value, sell it, and move on. If you are a buyer, my advice to you is to fix your credit, save for a good downpayment, and wait until you're ready to buy in the open market.

All the best,
0 votes
Elena Ravich,…, Agent, New York, NY
Sun May 19, 2013
It is not very common for Manhattan properties
0 votes
Jeff Albrecht, Mortgage Broker Or Lender, Austin, TX
Sat May 18, 2013
Rent to own "can" work, but when you go to purchase the home and use your rental credit, the credit has to EXCEED the fair market rental. you can only receive the amount that is ABOVE the fair market. so if he's asking $1,000 a month and fair market is the same, and you are paying $1,000 a month and the landlord wishes to give you $200 a month => then that won't work when you go to buy it.

What you are better off doing, is receiving "Seller Concessions" from your landlord when you go to purchase the home from him/her and obtain a mortgage.

Drop me an email and we can talk further.

Jeff Albrecht
Senior Mortgage Banker
“Mortgages Without Obstacles”
PrimeLending, a PlainsCapital Company
512-381-4643 direct
512-934-3121 cell
866-638-8172 fax
NMLS# 176723

Luxury Lending Made Simple
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