What is a rent to buy option in regards to the purchasing of a home? Is it common?

Asked by Anne, City Island, Bronx, NY Tue Jan 26, 2010

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Leasing To Own Solutions’ answer
Leasing To O…, , Dallas, TX
Tue Jan 26, 2010
Paul & Patrick....Let me first commend you on your unbias explaination of what Anne asked about Lease Options. (((clap, clap))) More often than not, Real Estate Agents tend to automatically give their opinions and bash Lease-to-Own deals...so thank you and I tip my imaginary hat to you.

Anne.... Paul and Patrick pretty much summed it up for you in a nutshell. Here is a link which goes through some of the Pro's and Con's of Lease-to-Own's from both the Seller's side and the Buyer's side. I wrote this a while back but it should give you a little more info.

And here is the Wikipedia version:

Lease-to-Own deals gained popularity starting in the 1970's. They provide another way to convey use and ownership of a property from one individual to another. They can be as simple as you WANT them to be or as creative as you NEED them to be. I've seen Lease-to-Own deals where the Buyer gave 10%-15% money upfront....and I've seen deals where the Buyer gave $1. I've heard of Lease-to-Own deals where the length of the lease was 6 months and also a lease that lasted 15 years.

There are only 2 Rules when putting together a Lease Option:
Rule #1......There are no Rules
Rule #2......See Rule #1

***BUT.......Do your homework and if you need help, make sure to pose questions to and/or retain the services of Knowledgeable Professionals who have completed and understand Lease Options (be it a Real Estate Agent, a Title Company, a Real Estate Attorney, or a Lease-to-Own Professional/Investor like myself). :)

Best Wishes!

Lease-to-Own Professional
Independent Consultant
1 vote
Paul Do Sant…, Agent, Secaucus, NJ
Tue Jan 26, 2010
When does renting with the option to buy make sense.
If you are tired of renting and want to purchase a home, and your credit, income or any other factors will not allow you to qualify for a home mortgage right now, then renting with the option to buy is for you. If your credit is a factor, then you need some time to fix it and increase your credit score. Renting with the option to purchase a home will allow you to live in the home you want to buy right now while you work on fixing whatever is holding you back from purchasing now. Good luck.
1 vote
Patrick Thies, Agent, Anytown, IL
Tue Jan 26, 2010
With a rent to buy, you rent the property for a certain time period and then at the end of that lease you have the option to purchase the property. You can either set the price at the beggining or at the end of the lease. You can also have it so that part of your rent will go towards the down payment. There are several ways to do rent with option. It is common and is a way for someone to get a house later on when they have better credit or income or whatever the situation is that would put them in a better buying position.
1 vote
Trevor Curran, Mortgage Broker Or Lender, Great Neck, NY
Wed Sep 12, 2012
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
Mobile: 516-582-9181
Office: 516-829-2900
Fax: 516-829-2944
PowerHouse Solutions, Inc.
185 Great Neck Rd, Suite 240
Great Neck NY 11021
Licensed Mortgage Banker – NYS Dept. of Financial Services
0 votes
Andrew Haxhiu, Agent, Bronx, NY
Wed Jan 27, 2010
Hey Anne,
This basically means you are leasing or renting a property with an option to buy it at a future date. The future price of the property should be fixed at the time the lease-option is signed.

Usually there is an up-front payment of some amount to purchase the option. The amount can vary. Sometimes the monthly payment is larger than normal and the excess is used to purchase the option. In some cases, the option money can be applied toward the down payment for the later purchase of the home.

Lease-options are usually done during a slow real estate market. During a hot market, the seller can simply sell the home in the regular manner.

best of luck,
Web Reference:  http://SearchNyhomes.com
0 votes
Don Tepper, Agent, Burke, VA
Wed Jan 27, 2010
Really good answers already, especially from HHI.

Just a few quick thoughts to address your specific question of "Is it common?"

It's not all that common--but it's not all that rare, either. The thing is, many/most homes for sale aren't listed as "rent to buy" (or lease-options, or lease-purchases). Some are, but most aren't. So sometimes you'll see comments here correctly noting that they're rarely found on the MLS. However, all that means is that you often will have to ask the seller whether he/she will consider a lease-option. To oversimplify somewhat, an owner who will consider a lease option is someone who ultimately wants to sell, but is willing to accept most of the money in the future. It's not someone who needs to sell in order to buy another home.

Falling into that category are people who've listed their homes as both for sale and for rent. Long-time owners of rental properties. Someone who has been trying to sell a now-vacant house, and has decided to rent it instead. And there are other situations, too.

Those situations are fairly common. And all are good prospects for become lease-option (or rent to own) properties.

You'll also find that the terminology varies geographically. There are some actual differences, of course, but in Michigan--for example--you'll hear the term "land contract." Other similar structures are "contract for deed." You call it "rent to buy." I call it "lease option" (or "lease purchase" if there's an actual purchase agreement). So, be open to the different terminology and understand the differences between them.

HHI is also right that "there are no rules." It's whatever you and the seller agree upon. However, having said that, there are various steps you should take to protect yourself. For example, you want to minimize the risk that the owner will stop paying the mortgage and the home you're living in (and expect to buy) will go into foreclosure. You also want to try to put language into the option allowing for an extension, especially if the value of the home drops during the option period. A lawyer familiar with lease-options can help you with that.

Hope that helps.
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