What are the pros and cons of a rent to own?

Asked by Noe Kennedy, 11434 Fri Feb 25, 2011

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13
Klopas Strat…, Agent, Chicago, IL
Sat Feb 26, 2011
Hi Noe,
I disagree with most of the nay-sayers here.... I have done over a dozen rent-to-own contracts. You should definitely hire an agent who is familiar with this. Not sure where 11434 zip is... but in Chicago you do not pay more than the listed rental price - regardless if it's a straight rental or a r-t-o... You are not obligated in any way shape or form to exercize the option; it is YOUR option as the renter, and there must not be any penalties if you do not exercize your right. At the end of the lease or 9 months in you choose if you want to purchase. UP FRONT, prior to signing the purchase contract, you negotiate what portion of the rent is a credit at closing (keep in mind if it's a high end rental there can be caps on the credit). I always suggest it come back to the renter as earnest funds. We are in a down market right now in Chicago, chances are in a year ( we hope) prices will be better.. if they are not you renegotiate the purchase price with the owner. If your agreed upon price is not market value and will not appraise it makes no difference to the owner because if you can't buy it because of apraised value, no one can.
I really feel you as the tenant have the upper hand. You potentially have earnest funds building (not just renting and paying someone else's mortgage) and if you are not satisfied you walk away just like any other rental situation.
2 votes
Lee Goade, Agent, GALLATIN, TN
Sat Feb 26, 2011
P.S.

Noe, you will get A LOT of misinformation from a lot of people who have never ever personally had anything to do with any creative financing Deals...

You'll notice the same B.S. Negative Message; that it's "Alway's" or "Never" and they'll talk about the "Usual" or "Usually" etc...

That's one of the beauties of "Creative Financing" is that it is what ever you make of it! What works for you? what do you need? what does the Seller need?

Rent is going UP All over the Country, So why pay too much for a reg. rental? what happens when you Buy a Hm. instead and then you change your mind next yr or the yr. after that? what about Maint. on a Hm. you Buy?

It all goes both ways... Do your Homework and maybe you can find the thing that is MOST IMPORTANT: A Good Fit for YOU and your family!
1 vote
Dp2, , Virginia
Fri Feb 25, 2011
Actually, there are several pros for the potential tenant/buyer. First, s/he has the option--but not the obligation--to buy a property. That essentially enables him/her to "try before s/he buys." Second, some owners will report the payments to the credit bureaus, and that helps some tenant/buyers to reestablish their credit. Third, tenant/buyers usually get the owner's permission to make more modifications to personalize their space more than they would for a pure rental. Fourth, many lease-options are transferable, so the tenant/buyer could assign his/her lease-option to another tenant/buyer for a fee (provided the term hasn't expired) if s/he needs/wants to move on. Fifth, tenant/buyers often can negotiate a fixed amount for the rent for the duration of the lease (which sometimes might span 2 or more years). That's a great inflation hedge.

You already know the cons for renting, and the cons for a lease-option are similar (especially if one opts to not exercise one's option).
1 vote
Tim Moore, Agent, Kitty Hawk, NC
Fri Feb 25, 2011
I can't think of any advantages to a renter, or at least not many. There are pros for the seller in that the renter normally will not or can not buy the house in the prescribed time which is often 1 year. Since home prices are falling there is a good chance the price you agree on today will be too high in a year and the bank, you try to get a loan from, will think you have agreed to too much and not give you a loan for enough to buy it. If you can't buy when the contract says then you loose your deposit and your monthly option money you pay each month on top of the rent. You end up with nothing and you also lost more money in the process.

My suggestion is to rent, fix whatever is preventing you from buying now and buy when you can. Rent to buy is just a bad idea for most renters. Most sellers won't even bother with them because they want to sell now and not have to go through it all again in a year from now.
1 vote
Scott Godzyk, Agent, Manchester, NH
Mon Feb 28, 2011
There are several pros for the renter, the first having an opportunity to build credit towards a house that can be theirs to own, also the time to be able to clear credit or save money for the down payment and closing costs. For the seller, it is knowing they will have a tenant that will take care of the property as it was their own. The key factors is to have teh tenant prequailifuied prior to signing a lease, make sure they can afford that sales price, that they will be approved for that monthly payment. They should simply nee dtime to save teh down payment or clean soem credit, they should be able to obtain a mortgage in 2 years or less. If they can not obtain a mortgage in this amount or in this time, they are not a good fit for that home.

Please see my blog for a complete list of tips and advice on how to rent own for tenants and for home owners
0 votes
Lee Goade, Agent, GALLATIN, TN
Mon Feb 28, 2011
Sophia,

I agree! I am Very perplexed by the number of Negative L/O comments by Realtors. Ignorance is Bliss I guess?

Are these people forgetting that there are two people (Buyers & Sellers) who are trying to "Find a satisfactory Deal"??? Are they So far behind in their thinking, that they still think the Sellers have all the power and can dictate what a L/O buyer can and cannot do?

In THIS Market there are Many, many Reasons why Sellers NEED TO SELL or just get out from under their mortgage pmt. There are Many. many Buyers who would LOVE to take advantage of these Low prices in todays Market. Some have Bad credit #'s but DO HAVE Plenty of $$$. Some have NO $$$, but great credit. And some have a mixture of the two and CONVENTIONAL Financing is NOT an option.

Many, Many, Many People today ARE NOT traditional "renters" who "will never change"... Many are Renters by circumstance. So, yes Many of them NEED a place and a chance to start over again.

In a Market like this, Many L/O Sellers are in the very same position and Not necessarily the A typical Landlords of the past....

There ARE ALWAYS RISK'S involved with contracts. ALL CONTRACTS! Like DP2 said; the Renter has All of the option. But, none of the obligation.
*
http://www.trulia.com/blog/leegoade/2011/02/the_1st_step_to_…
**
0 votes
Bruce Lang, Agent, Philadelphia, PA
Sat Feb 26, 2011
It depends on how the contract is written. It may have no advantages and it may help a renter have down money to puchase. In most cases it never works out as the parties rarely agree on terms.
0 votes
Crystal, , Greensboro, NC
Sat Feb 26, 2011
Noe

I would have to say that the pros and cons of a rent to own (lease to own) solely depends on who you are in the transaction. If you are the investor in a market like today pro- while renting you are likely to make $$ if the deal closes when expected by the renter/now new homeowner then it is possible to make a great return on the investment in a decent amount of time. con- renter doesn't close as expected in today's market (where home values are effected along with many other differnt possible wrenches) ...$$ loss....This is just one example from one side briefly stated.

As the renter, pro- you are receiving an opportunity to accomplish the goal of Homeownership that you may not feel you were able to receive elsewhere. Make sure that you are serious & understand your personal situation clearly (finances, budget, credit, savings, education, etc) and what you have to do to get to the Goal of Being a Successful Homeowner. It all depends on the owner you are renting & planning to purchase from as well. If the rents are comparable to other locations in the area you are okay, if it is priced at a ridiculous amount monthly and in closing...this can be costly for you and may not be a great deal. I just would recommend to have someone look over the documents on your behalf and not be blinded by the opportunity to rent to OWN! As we know, not all opportunities knocking are ones we should open ourselves to!!! If you are considering a rent to own option...find a Realtor in your area that is not about just making a sale, but focus on being a service to his/her community as an expert in Real Estate!

Crystal
0 votes
FarOutWest, Home Seller, Springfield, MA
Sat Feb 26, 2011
The disadvantages far outweigh the benefits to a renter in a 'rent to own' lease. The sophisticated and experienced real estate investor may negotiate such a contract in a highly volatile market, but that investor doesn't gain his understanding of the market by reading the Trulia Q&A.
0 votes
Terry Bornitz, Agent, Minnehaha, WA
Sat Feb 26, 2011
I can't think of a good reason to rent to own, you pay top value for the home, you pay out more rent for the property,and you are responsible for any damage done to the home. At the same time the seller has to worry about his tennant buyer skipping out on the home if the renter finds out they don't like the neighborhood or the home. This makes for a very unhealthy relationship for both parties. Just find a home to rent for a 6 month term, and when you are ready to purchase you have the ability to negotiate, you'll feel better in the long and short run.
Web Reference:  http://terrybornitz.com
0 votes
Lee Goade, Agent, GALLATIN, TN
Sat Feb 26, 2011
Rent to Own, Lease option or Lease Purchase...

These are all acceptable and can be profitable practices for all parties involved "if written properly". This Question comes up a lot so, here is a couple links to read to get you started. You'll see some different perspectives good and bad! Right and Wrong!

http://www.trulia.com/voices/Home_Buying/Pros_and_Cons_of_Le…

http://www.trulia.com/voices/Home_Buying/how_do_you_rent_to_…

Good Luck Noe! These Deals are sure to begin to take over the Market as the economy continues to improve! As a Realtor I'd rather "Sell" you a Home. But, as an AMERICAN I'd rather see eveyone begin to prosper and to see everyone at least have the opportunity to begin to own NOW!

Check this out: http://www.trulia.com/blog/leegoade/2011/02/the_1st_step_to_…
0 votes
dave, Agent, Charlotte, NC
Sat Feb 26, 2011
Noe,

The pros to a rent to own are few. First, the term is usually to years or longer. Though you can go shorter if you want. The payment is a fixed payment during that term. This means even with inflation you don't have to worry about the payment increasing. Second, most times a portion of your rent is applied to the principal balance of the agreed upon price of the house. The norm seems to be between $100 and $200 of the payment. So when you go to close that money is applied towards your down payment. Third, you come to an agreed upon sale price prior to starting in the process. If the hosuing market turns around as expected you could gain a windfall in equity in the house when you go to purchase it.

The negatives are that you probably paying more than you would normally pay for a comparable rent in the area. If you decide to not purchase the home due to finances or other reasons you would have paid anywhere from an extra $1200.00 to $2400.00 a year more than if you rented somewhere else. Most times you also have to put down somewhere from a minimum of $1000.00 and up down that you would also lose.
Web Reference:  http://www.davedicecco.com
0 votes
Anna M Brocco, Agent, Williston Park, NY
Fri Feb 25, 2011
There could be many pitfalls in a rent to own situation, and one could stand to lose a bit of money--therefore inform yourself well beforehand--consider consulting with an attorney who specializes in real estate, research such a scenario online as well, etc., so that an informed decision can be made. If you haven't yet visited with any qualified loan officer(s), consider doing so--after reviewing your overall financials, credit, debt, etc., he/she can make a determination as to qualification--if you don't yet qualify, your loan officer may offer great suggestions as to what needs to be done in order to qualify in the very near future--important to know before entering into a rent to own scenario.
0 votes
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