How does the rent to own a home process work? Is it an easy process?

Asked by Gibby2, Huntington Beach, CA Fri Mar 9, 2012

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Jim Simms’ answer
Jim Simms, Mortgage Broker Or Lender, Louisville, KY
Sun Mar 11, 2012
It works very well for the seller; they usually get a large non-refundable deposit, higher rent and never transfer title to the “buyer.” I hope the information in my blog post linked below keeps you from getting hurt, good luck,
1 vote
Well thanks for that, So many people these days just dont care about other people.
Flag Tue Nov 12, 2013
Tina Lam, Agent, San Jose, CA
Sat Mar 10, 2012
Renting to own just means you're asking the seller to help finance your purchase through higher rent payments. The process itself is easy since you just need to write up a simple agreement on a proposed purchase price, the deposit, the rental rate, and time horizon. After a set number of years, you get to apply your high rent payments towards the downpayment. However, if you change your mind or are just unable to meet the payments, you've just forfeited any gains.

Beyond that, your main difficulty is finding a seller willing to provide you this type of financing at a reasonable rate. Frankly, that's quite a hurdle, one that even experienced agents have trouble finding. Often, you're better off focusing on saving up a downpayment of 3.5% and use FHA financing for a regular purchase.
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1 vote
Andrejlisjak, Home Buyer, Costa Mesa, CA
Mon Jul 25, 2016
0 votes
Sylvia Decos…, Other Pro, New York, NY
Thu May 12, 2016
I am thinking about a rent to own home. I've been hearing a lot of negative things about this rent to own and I am a little reluctant to do it. I am paying $1000 a month to rent and apartment and I could have a house. what I am looking for is a 6 bedroom 2 family home with a backyard, porch, basement and attic.
0 votes
Robert Chome…, , San Diego, CA
Sun Mar 11, 2012
Rent-to-own is usually another name for lease-option. Basically you lease a house with an option to buy it in the future at a set price. Then at the end of your lease you get a loan and buy the property. Be careful with this as the vast majority of lease-option buyers never exercise their option (mainly because they can't qualify for a loan at the end of their lease period). Here are some tips:

1. Negotiate the lowest down payment you can
2. Negotiate the longest lease period you can
3. Negotiate a portion of you lease payment to go towards your down payment
4. Make sure the option is recorded at the county recorders
0 votes
Keith Jones, Agent, Seal Beach, CA
Sun Mar 11, 2012
In general "Rent to Own" is a situation where the tenant has some sort of agreement with the landlord to ultimately purchase the property in the future. I've heard different opinions on whether it is a good or bad situation but it really comes down to the terms of the “To own” part. You get the “RENT part; You pay Mr. X some money to live in Mr. X’s property. The “to own “part will mostly likely come with additional compensation to Mr. X. (Examples include: higher rent, down payment, Good faith deposit,etc). The other thing that it does is establish a price for the future purchase. This is a PRO if prices are going up and will be higher in the future. A potential Con if prices are going down (depends on negotiation, etc)

Ex: YOU agree to purchase property for $250,000 within 2 years. 19 months later the property could be worth $ 300,000 (Yeah) or $200,000 (Hmmm).
0 votes
Bob Phillips, Agent, Rancho Santa Margarita, CA
Sat Mar 10, 2012
Hi Gibby2. Here's an article I came across just this morning:

Rent-to-Own Deals are Usually Good for Sellers, Bad for Buyers. March 9, 2012

Most people buy real estate hoping that homeownership will turn out to be a good investment. But increasing wealth doesn’t always come with buying. The same is also true for rent-to-own scenarios, where caution is also highly recommended.

The main issue with this form of home buying is that in most metropolitan areas, only about 1-to-3 percent of available housing is a rent-to-own (R2O) offering.

Here’s the reason that’s a problem: The vast majority of wealth earned in real estate comes from long-term ownership. If in that small pool of R2O offerings you don’t find a property you really feel good about, yet you still enter into that deal, this is more likely to result in you not owning it long term, because that home was not what you really wanted in the first place.

Bottom line: You probably won’t increase your net wealth as a function of buying that property.
In addition, most people trying to do a R2O deal are trying this strategy because they’re not creditworthy enough to qualify for mortgage financing. If you can’t qualify, the bank is telling you that they have concerns that your financial picture may lead you to default on a mortgage loan.

My advice? Please, take their advice! Work on your creditworthiness. Get some credit counseling from a reputable non-profit credit counseling organization. Get your financial house in order. You are most likely better off saving your pennies and working on your creditworthiness so you can buy that perfect home with low interest rate, fixed long-term financing a few years down the road.

Also, many R2O deals are offered by investors who bought the property and are selling it to you so they can make money! Many of these investors ask above-market prices for the properties because they assume you have no other option.

Additionally, many times the “rent ” is above the comparable market rent . So market rent might be $1,500 but you are paying $1,800 with that additional rent to be credited (termed “rent credit”) for your down payment. But if you aren’t able to purchase for any reason, including the chance you can’t secure bank financing, you don’t get that extra rent credit money back. So the seller keeps it. You lose.

Of course, all terms are 100 percent negotiable, so if you try one of these R2O deals, feel free to negotiate all terms to your advantage, and good luck.

I know people want to own real estate to earn wealth, and I’m the biggest proponent ever, since this can be a great way to earn long-term wealth. But doing a rent-to-own deal is unlikely to increase your wealth and more likely to end up costing you money via forfeits of those additional rent down payment when you move out.

Oh, did I forget? It’s estimated that only about 10 percent or less of renters in R2O deals actually are able to close the purchase. So at the end of the day, you’ve paid above market rent to someone else. I’m sure they appreciated your increasing their net wealth? But for you, the better route would have been leasing a normal rental and saving money. That’s a more solid strategy for building wealth.

If you want to earn wealth on real estate, you need to buy that near-perfect property for all the right reasons — which is because you want to own real estate for a long time. That’s my philosophy, and it should be yours, too!

Leonard Baron, MBA, CPA, is a San Diego State University Lecturer, a Zillow Blogger, the author of several books including “Real Estate Ownership, Investment and Due Diligence 101 – A Smarter Way to Buy Real Estate.” Read useful tips for real estate buyers in his blog, Making Smart and Safe Real Estate Decisions . See more

Good luck in your decision making.
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0 votes
Mario Gonzal…, Agent, Riverside, CA
Fri Mar 9, 2012
Hello Gibby2 !

â–º A 'Rent to Own' in my humble opinion has too many entrapments and ways to go wrong for the buyer that it shouldn't be considered.

â–ºIn today's market,The prices are low, the rates are low, and downpayments are 3.5% down and in many instances down to 0,5% downpayment for FHA financing.

Why walk into a mine field when you can take the safe route of buying your home out right ?!?!?
â–ºDon't think you are ready, been turned down, WANT A 2ND OPINION ???

Call Me, I'll be happy to meet with you over a cup of coffee and see how we can make you a home owner the safe and easy way !!!

Most Kindest Regards,
Mario Gonzalez
JD Power & Associates Ranked #1 Buyer Satisfaction 2008, 2009, 2010
Chase Bank Preferred Agent 2008, 2009, 2010, 2011
Short Sale & Pre-Foreclosure Certified *
REO Buyer Agent & Distressed Property Certified
DRE LIC 01708214
0 votes
Brian Head, , Orange County, CA
Fri Mar 9, 2012
The "Rent to Own" also known as "Lease with Option to Buy" process is great if you can negotiate the right terms with the seller. In any real estate transaction you should have a real estate professional involved in the process for your protection. Until your on Title your still just a tenant and only have tenant rights. And, if your not on Title you really have no idea of whats happening with the Title. Now, with that being said, I've seen many different types of situations where the seller allowed the buyer to put a portion of the rent towards the down payment and I've seen situations where a buyer thought he was working towards a purchase but the mortgage wasn't being paid by the seller and the home went into default. Try to make arrangements to be involved with the Lender. Insist on making the payment directly to the Bank. Have the Seller sign an Authorization form so if you have questions for the Lender you can call them directly. These are the types things that a Real Estate Professional can protect you from. Also remember that the longer terms you can get, the better. Try to avoid a 1 year option, always go for 2 or 3 years, if you can get 5yr option, even better.
Be sure the terms of the purchase price are in line with the market value at the time the home changes Title. Who can really say what any home will be worth 2yrs let alone 5yrs from now. In this market the house could decrease in value. Be careful on who has the property tax obligation and insurance liability. Since your not on Title you cannot get a Homeowners insurance policy in your name. Your still a renter until your on Title. There are several other issues with this type of transaction so i can only say these two words. Buyer beware.
I'd be glad to consult you through this process if you need help.

Brian Head, Realtor
Joel Feinstein Law
949 306-3556
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