Some sellers will consider a rent-to-own contract, but most want to cash out of their property, so that they don't have to worry about maintenance, paying taxes, and tenant relations. My question for you is, why would you want to rent a property when you probably can arrange for a low down payment mortgage? With interest rates in the 3.5% to 4% range, it takes less income than ever to qualify for a mortgage loan.
Whenever I have a client who asks about rent-to-own, I caution them to beware of the risks of such an arrangement. Rent-to-own contracts, whether for a home or for a television set usually set out terms that overwhelmingly benefit the seller of the property, to the detriment of the buyer.
The concept of rent-to-own property sounds good on its face: you pay approximately the same amount that you would to rent a home or apartment, but a portion of that rent is set aside toward the purchase of the property. When there is enough in the set-aside amount to qualify for a mortgage, the buyer applies and if the mortgage is approved, pays the seller a pre-determined amount to purchase the property. Many people who either cannot qualify for a mortgage or think they might not qualify decide to try to purchase property under such a contract.
The reality of rent-to-own is that most renters who sign such an agreement never qualify for a mortgage. Usually rent-to-own contracts specify a limited time period within which the buyer must qualify for a mortgage, or the contract becomes void (and oftentimes the buyer loses the entire set-aside amount).
Other common terms of such agreements can work against the buyer. One such term is a penalty for a late payment that either reduces or eliminates the amount put in escrow toward a down payment and/or voids the contract. This means that if you're late on rent, the seller may have the right not just to keep all that you've paid, but also to sell the property to someone else.
There are certain sellers who enter in to such agreements as a matter of course with tenants, charging a higher-than-market rent to cover the down payment escrow, betting that the tenant will not be able to qualify for a mortgage in the specified time period. These sellers typically will sign such an agreement to sell a less-than-attractive property to a purchaser with a less-than-attractive credit history. The outcome is usually a higher-than-market return for the seller on a property that never gets sold.
Of course, not every seller is in the business of taking advantage of buyers when they propose a rent-to-own agreement. The question that bone fide sellers will always ask, though, is "why don't you apply for a mortgage?" If they truly want to sell the property, not just make a profit by renting it, they will more likely ask you to obtain a mortgage to purchase the property immediately.
Betty, I noticed that you were interested in a property in Chicago. I suggest that you investigate a couple of options for down payment assistance for buyers:
CityLift Down Payment Assistance Program - http://www.nhschicago.org/site/news/citylift_down_payment_as
IL Housing Development Authority SmartMove Program -
Both of these programs can help you to obtain financing by providing you with a grant for down payment assistance. They also will assist you in getting a mortgage loan. Take a look at their web sites to see whether you can qualify -- I'm certain it will get you into homeownership more quickly and less expensively than the rent-to-own option!
Don Pasek, CIPS, TRC, ADPR
Omniterra Real Properties
+1 (773) 763-7000