Rhez77, Home Buyer in Los Angeles, CA

Is rent-to-own that bad?

Asked by Rhez77, Los Angeles, CA Tue May 14, 2013

My fiance and I were approved for a loan for our first house but it's going to take years for us to save for even a small downpayment. I'm so sick of renting and it looks like prices are going up again. Is rent-to-own that bad? Is there a way. we could guarantee a positive end result?

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Answers

15
I agree with many of the points Debra makes below.

The benefits of owning a home and potential of equity are great - but the responsiblity, upkeep, and associated cost of the property are equally as great. I would take a second look at your finances and determine whether buying is a good move for you right now. Unexpected things WILL go wrong, need to be fixed/replaced etc., and those "things" don't care that money is tight. You don't want to become "house poor" simply because you don't want to "miss the boat" before prices rise.

As far as rent to own goes - lease to own homes are laden with pitfalls for the buyer. They are not an easy way to buy a home without having the sufficient credit, income, and down payment to do so, as most people seem to believe. Here are some reasons why they are a monumentally bad idea:

1. You'll still have to typically come up with a lump sum (essentially a down payment) or "option" to enter into the agreement. This is due upfront and is usually a percentage of the purchase price. Plan on a certain percentage of the purchase price (1-2%), which can amount to thousands depending on the price of the home.

2. You'll agree on a date when you'll have to exercise the option to buy. Let's say 2 years from now. At that time, you'll still have to qualify for a loan, and have sufficient down payment.

3. If you pay the rent late even once, the seller typically reserves the right to keep everything and void the deal.

4. How do you know the price you negotiate down the road will still be a good deal when it comes time to actually purchase the property? Will you qualify for the financing then? Will it appraise out?

5. You'll be responsible for the upkeep of the property throughout the life of the lease. If the furnace goes out, you'll have to fix it. Same for the roof, plumbing, and everything else. Remember, this is for all intents and purposes now "your" house.

Violate any of the above terms and the seller keeps everything you gave them upfront, and also all of the money credited towards your down payment from each month.

Too much risk, too much money, and too much uncertainty about what your situation or finances will be too far down the road in the future, in my humble opinion.

Hope this helps!

Terry Farnsworth
Licensed Broker
Prospect Equities Premier http://www.SelectiveBuyer.com
1 vote Thank Flag Link Tue May 14, 2013
excellent and comprehensive post!
Flag Tue May 14, 2013
Rent to Own or Lease with the option to buy can be a successful transaction if both parties are in full agreement on the worse case scenarios. The contract should read easily for both the "tenant buyer" and the current owner. Usually the owner will want some type of down payment or "option money" so if you decide that you do not want to buy the home at the end of the term, they will have some compensation. I have spent a lot of time researching lease options and would love to answer any questions you may have.

Another great option would be to have the seller finance for you instead of the bank. Again, this may be hard to find without a down payment, but it can be done. Some sellers are open to this type of sale if they are in a situation where they have to pay capital gains or they simply enjoy getting a monthly income and interest rather than a pile of cash all at once :)

Hope my answers help and I would love to work with you and create a wonderful situation for you and your fiance in this market.

Sara Joy Cramer
"Allowing Mother's Intuition To Guide YOU Home!"
0 votes Thank Flag Link Wed May 15, 2013
It's a terrible idea........

You ask above if there is a way you could "guarantee a positive result?"

NO, there isn't..............

Reread most of the responses below - then ask yourself if you still think it's a viable idea.
0 votes Thank Flag Link Wed May 15, 2013
I think rent to own is a perfect scenario for you. This way you are able to slowly build towards your down payment while enjoying the home. It is a win-win if you can find a seller that is willing to rent to own in this crazy market we are in. In this sellers market the owners/sellers do not have to do any creative marketing tactics to get there home sold so it is very unlikely that anyone would want to rent to own their property right now when they could just sell it, literally in a week. I wish you the best of luck!!
0 votes Thank Flag Link Wed May 15, 2013
If you are just coming out of a short sale, foreclosure or bankruptcy, this might not be a bad option for you. Sometimes this can give you breathing space and an opportunity to build your credit score, as well as your financial larder.

I wouldn't categorically discount it as an option.

Charnell Havens
Prudential Towne Realty
757-234-1445
0 votes Thank Flag Link Tue May 14, 2013
Good afternoon Rhez77,

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

*If you thought my answer was helpful, please give me a “Thumbs Up” or “Best Answer.” Thanks!
0 votes Thank Flag Link Tue May 14, 2013
Consider the following:

1. As a buyer you essentially forfeit your ability to negotiate a fair price. Most rent-to-own buyers over pay!

2. These sellers generally have a very poor appreciation of the "real" local market activity

3. Any seller is going to take necessary precautions to protect their investment and thus will require a
sizable non-refundable deposit.

4. Generally, only a portion of the monthly rent is credited toward paying off the debt of the home. Don't forget, you'll be responsible for upkeep and taxes.

5. The "lease to purchase agreement" will likely be drawn up by the sellers attorney. Who do you think it will favor? Carefully consider the terms by which the seller can reclaim the property from you without any refund.

Entering into one of these agreements is no something that should not be done without a clear understanding of the terms before you and your own personal representation. These arrangements can work but you need to be certain your rights are protected also.

Good luck,

Bill
0 votes Thank Flag Link Tue May 14, 2013
Personally - I don't LIKE rent to own - too many IFs -
0 votes Thank Flag Link Tue May 14, 2013
of course not....renting in some cases is the best choice. BUT in the long run - owning real estate is the best hedge against taxes, inflation and a secure future.

always talk with your tax man to see the best way .... never just take a realtor's advice - we always want you to buy - but that may not be the best in your circumstance today -

maybe later on - but my motto is I Specialize in YOU! to Build Happiness. I don't know what is right for you on taxes, inheritance, the future.

I only know what is good today - call me - lets talk - after you've spoken to your tax man. OK???
0 votes Thank Flag Link Tue May 14, 2013
Your rent to own opportunity is only as good as the agreement you have with the seller/landlord. My question is who told you that you needed a pile of cash to get into a home? There are programs available for first time home buyers who need low down payments, or even down payment assistance. So, if you are really serious about wanting to buy a home, I can help you become a homeowner. I have some free information for first time home buyers at http://www.StopMyRent.Info

Kindest regards,

Frank Codispoti
ReMax TerraSol
714-584-5509
0 votes Thank Flag Link Tue May 14, 2013
It's not necessarily bad. There are just few opportunities to do this. Typically sellers resort to offering rent-to-own options when they can't sell their home. Right now, the sellers market is hot so I see almost no advertisements for this.
0 votes Thank Flag Link Tue May 14, 2013
Guarantee??? Absolutely NOT!!!!
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Improve your probabilty of success? Absolutely YES!
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As Ron stated, the need to curcumvent an efficient, effective process that PROTECTS HOME BUYERS is the action of those who are desperate. Desperation is the fragrance of the prey of those who wish you harm. Rent/own, Lease/Opt are highly developed processes that take advantage of the desperate. There are exceptions. These exceptions are never accompanied by advertisment of rent/own or lease/opt real estate. These exceptions are created as a solution to a unique problem, not as a real estate investor STRATEGY.
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You MUST get your financial house in order. If you are unable to save the meager amount needed for a downpayment, you will certainly be unable to afford the tax increases, insurance increases, maintaintnece increases, utility increases that are GUARANTEED with home ownership.
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#1. Start with eliminateing the pedatory fees you are paying to Wells Fargo.
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#2, Use peer-to-peer lending to pay off these debts...and chop up those cards! (lendingClub.com)
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#3, Consult a LOCAL lender to construct a budget and savings plan to position you for home ownership in 12 to 24 months. (it may take longer)
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#4. Contact a local real estate professional to evaluate the housing that will be avaialble at the projected price point at the time you will be eligible. This will allow you to prepare for you new lifestyle.
http://(www.bankingGrades.com) Select an A or B graded local lender.
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#5. Carefully consider the security that a WalkableHome provides. A safety net is always important for first time buyers.
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#6. This should be #1. Disapline yourself to save, control you spending, and keep you debt minimized. Live within you NEEDS....not your wants.
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#7. Evlauate what options are availeble to increase your income.

Best of success,
Annette Lawrence, Broker/Associate
ReMax Realtec Group
Palm Harbor, FL
727.420.4041
http://RealEstateMadeEZ.us
0 votes Thank Flag Link Tue May 14, 2013
If it's going to take you years to save for "even a small down payment", and money is that tight, then maybe you're not ready to own a home.

You don't want to put yourselves on thin financial ice.

Owning and maintaining a home can be costly - it's much more involved than simply paying the mortgage, taxes and insurance.

You won't have a super to call in to fix things...........not only should you have a down payment (regardless of the amount) but you will also need to have a cushion - ie - savings over and above the down payment.

Until you have that, I wouldn't suggest you buy a home...and I would say stay away from a rent with the option to buy arrangement.

A new roof or furnace is expensive - what would happen if an unexpected repair or personal emergency occurs and you have no savings to use?

You need to be prepared or the "American dream" could turn into the American nightmare.

Best wishes.....
0 votes Thank Flag Link Tue May 14, 2013
Yes,

Lease/Option
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!

Good luck and May God bless
0 votes Thank Flag Link Tue May 14, 2013
Hi Rhez,
Did you know that there are loans out there for 1/2 % down?
there is a program where you get an FHA loan which is 3.5 % down and the government puts 3% of that for you. If you buy a $200,000 place that is only $1000.00 you have to put down.
It has been my experience that most of the rent to own stuff is just someones way of making money on people. They charge you more rent and set aside a small portion for the down. YO can save your own money!
My opinion is it is not necessary or helpful for you.
Talk to a lender that does the .5% program. If you do not know one I can refer you one.
Connie Bramble
Prudential CA Realty
714-337-8718
dre#898302
0 votes Thank Flag Link Tue May 14, 2013
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