We are interested in a rent to own arrangement ,within 5 yrs, are sellers usually ok with this or should we just wait until we are truly ready to buy?

Asked by Betty, Chicago, IL Sun Apr 21, 2013

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17
Don Pasek, , Chicago, IL
Sun Apr 21, 2013
Hi, Betty:

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 -
http://www.ihda.org/homeowner/faq.htm#buyingahome

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!

Regards,

Don Pasek, CIPS, TRC, ADPR
Omniterra Real Properties
Chicago
+1 (773) 763-7000
1 vote
Christina Ha…, Other Pro, Morristown, TN
Sat May 4, 2013
Betty:

I am curious as to why you need 5 years to obtain financing? Owning a home can be accomplished within 1-2 years even with the lowest of credit scores. Not to mention many lease with option to purchase may not exceed that time frame of 1 to 2 years. I understand that owning a home is the ultimate dream come true. But it truly isn't that hard to accomplish with the right team of professionals on your side to help guide you through all of your obstacles. I used to broker loans but now consult on credit, debt, and budget issues to help people like yourself make and adhere to a budget and a plan so that you can own in little time. I'd love to discuss what we offer in more detail.


Have a great weekend.

Christina Solorzano;
CEO & SR Credit & Mortgage Consultant of
Everlasting Credit
Ex-Mortgage Broker of more than 10 years
http://www.everlastingcredit.com
0 votes
Trevor Curran, Mortgage Broker Or Lender, Great Neck, NY
Fri May 3, 2013
Good evening Betty,

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
Manuel Brown, Agent, Chicago, IL
Mon Apr 22, 2013
Dear Betty,

You have received a lot of excellent advise. Don gave you the most detailed answer. Currently, I myself in the middle of assisting a mother of six to purchase her new home. We have a house under contract and she is getting assistance through the Illinois IHDA program. Work with a lender who is familiar with these programs. You never know what you may already qualify for and you can find out for free. I send my clients to Mary Kay Laurent (773) 516-6589 with Guaranteed Rate.
0 votes
Paul Cionczyk, Agent, GLENVIEW, IL
Mon Apr 22, 2013
Betty,
It seems your questions was answered mostly below. Another option you might consider, is that there are several companies out there that are doing a lease type program that gives you the option to buy. They screen potential tenants and make sure that their basic criteria is met, and then arrange in advance what the rent prices will be every year and what the cost to buy it every year for you would be.

Good Luck

Paul Cionczyk| Coldwell Banker Residential Brokerage |Broker
312-433-9931 | PaulCionczyk.Broker@gmail.com |PaulCionczyk.com
Web Reference:  http://www.paulcionczyk.com
0 votes
Tony Guisto, Other Pro, mokenA, IL
Sun Apr 21, 2013
Hi Betty,

Depends on the in vestors situation.
0 votes
JIM Michaels, Agent, Chicago, IL
Sun Apr 21, 2013
email me at jmichaels@remax.net and I will send you what I have on that property
0 votes
Sarah Ziehr, Agent, Chicago, IL
Sun Apr 21, 2013
Hi Betty,

Some sellers are open to this but they are few and far between. I have found that most of the time, sellers want to sell and move on.

If you don't feel you are ready then I would recommend to stay put, improve your credit and increase your savings. In the meantime, do not make any large purchases or change jobs.

Good luck!

Sarah @ Jameson Sotheby's International Realty

312-339-4460

sarahz@jamesonsir.com
0 votes
Matt Laricy, Agent, Chicago, IL
Sun Apr 21, 2013
Just rent. It gets too complicated trying to do both.
0 votes
Sharon Averh…, Agent, Chicago, IL
Sun Apr 21, 2013
This for sale only. The condo developement is owner occupied only.
0 votes
Bill J Delig…, Agent, Naperville, IL
Sun Apr 21, 2013
Wait - Keeping working, saving your money and improving your credit. Work with a Loan Officer from now so that you have some direction as to what you need to purchase in the future.

Feel free to contact me should you need any assistance.
Web Reference:  http://www.BJDLOANS.com
0 votes
Marc Rutzen, , Chicago, IL
Sun Apr 21, 2013
Where are you interested in renting? In some markets around Chicago now would be a very good time to rent with the option to buy at a predetermined price, as home prices have bottomed out and supply is constrained. Prices will bounce back fairly quickly in the next year before settling into a constant growth rate. If you're interested in the south suburbs at all I am working with an investor who wants to buy single family homes and lease them with the option to buy...
0 votes
Joe Schiller, Agent, Chicago, IL
Sun Apr 21, 2013
bad idea in almost every way
0 votes
Mark Malave, Agent, Chicago, IL
Sun Apr 21, 2013
The market is no longer slow, so most sellers would not consider this arrangement. I have negotiated several of these, but none in the last 18 months. At this point, you should probably wait until you are ready to purchase.
Web Reference:  http://Www.markmalave.com
0 votes
Dirk Gould, Agent, Chicago, IL
Sun Apr 21, 2013
These agreements are usually a bad idea for buyers; both legally and financially. And there is so much uncertainty if you are talking five years out. Just save up the money. Let me know if I can give you any guidance as an attorney or realtor.
0 votes
Philip Sencer, Agent, Chicago, IL
Sun Apr 21, 2013
Just wait. Rent to own are potential disasters and almost impossible to find. Why will it take 5yrs? Speak with a couple of lenders and see what they say.
0 votes
Mack McCoy, Agent, Seattle, WA
Sun Apr 21, 2013
You should wait until you are truly ready to buy.
0 votes
Betty, simple rule of thumb with any of these answers below: If it sounds too good to be true, it usually is. I agree wholeheartedly with all the honest people who suggested that you just wait and save your money until you are truly ready to buy a home rather than rent to buy. Don't believe anyone who tells you that you won't need a substantial downpayment. Don't believe anyone who tells you that you will qualify right off the bat for a 3% or 4% interest rate. That is exactly how many people wind up losing their homes: the people doing the lending will do whatever they need to to get you that loan and have you sign on the dotted line, but most fail to inform you of the terms of your loan, meaning a few years down the line that mortgage payment could balloon to a price you will never be able to afford. Think about it: does it make any sense that "it takes less income than ever to qualify for a loan"? Home-buying is the same it's always been: you need a good-sized downpayment, decent credit, and good, stable income. Plus the savings you need for the what-ifs of owning a home, such as, what if you suddenly need a new hot water heater, or a new roof? Just take a look at who you're getting your advice from: loan officers who make their money by getting you a loan, credit counselors who make their money by teaching you how to put money in a bank account and pay your bills on time (something that doesn't take a rocket scientist or a counselor to figure out how to do), and real estate agents who make their money by selling you that house that their loan officer friend got you the loan for.
Flag Mon Mar 24, 2014
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