what questions should i ask about renting to own my first home?

Asked by Patricia Jahn, San Antonio, TX Sat Mar 6, 2010

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Shawday Bent…, , Memphis, TN
Sat Mar 6, 2010
There's a good chance that since you're looking for a home to live in you don't have immediate access to an attorney or a CPA. Those words might even be a little intimidating to you, actually. I think they are for most people. Not to mention, they sound expensive. But their consultation probably wouldn't be, and may even be free in your case if you can find the right one with a few minutes to spare.

With that said, here's some general considerations and questions I think you were looking for:

- How long is the option term and is there a renewal clause built into it? If yes, what are the terms for renewal?
- Are they selling the house as a lease-option or lease-purchase. There's a difference. An option allows you the right to walk away from the house. A lease-purchase will hold you liable to buy the house at the end of the term
- Is your purchase price locked in at the time you sign? It should be, instead of being left as a percentage of market value at the time of close
- Ask to see current loan paperwork on the house. Ideally you want to lease a house that has a fixed mortgage on it with a lower monthly payment than what you'll be paying. Otherwise you open yourself to the house being pulled out from under you by a bank foreclosure. I'd steer clear of anyone who refuses this request
- Ask if the seller will set up an escrow account for the current mortgage company to be paid from, or if you can pay them directly, then pay the seller the difference. You want to make sure the underlying mortgage company is getting paid every month. Otherwise again, you could have your house and investment foreclosed on.
- You'll normally be responsible for repairs of all levels but ask your seller how insurance is being handled on the house, then ask to see the paperwork to make sure it exists. Finally, have the seller add you to the policy as an insured (for more on this subject you'll want to contact the insurance broker, or one in your area)
- Ask if a portion of your payment will be applied to the purchase price. Ideally you'll want to negotiate for this as best you can. Make sure it's in the contract and in doing so you give yourself equitable position in the house that will hold up in court should your seller try to flake on you in the end.

I hope all this helps. And best wishes to you in your home search : ]
2 votes
T.E. & Naima…, Agent, Dallas, TX
Sat Mar 6, 2010
The reason the state law discourages contracts that don't close within 6 months is that the "buyer" risks having the seller default on an obligation and the property involuntarily changes hands to the seller's creditor.

Huh? The seller fails to pay his mortgage, for example, and his bank forecloses while the renter is expecting to get title to the house later. Instead, the renter gets a notice for the bank to move out.

Because this identical problem happened to a lot of people due the same guy defaulting on a lot of properties all at once, the state legislation addressed the problem by forcing sellers to make disclosures on a regular basis or else be subject to penalties, such as losing all monies received from the renter. This makes sellers skittish about doing future sale contracts of any type.

Just because the law attempts to protect the renter, doesn't mean he is protected. Ask your Realtor what's the right way to buy a home and you'll find seller financing on the list of options. It is far safer for both buyer and seller, but still burdens the seller with the risk that the buyer will not keep up with monthly payments and cost the seller a chunk of money to fix the problem.
Web Reference:  http://www.MyDFWLakeHome.com
1 vote
Matt Stiglia…, Agent, San Antonio, TX
Sat Mar 6, 2010

The first question I would ask is:

Am I willing and able to take on the risk of a lease-purchase (rent to own)?

I know there are many reasons that people pursue these arrangements, but I have seen too many go down in flames to find them a winning choice for buyers. That's not to say that there aren't plenty of cases where everythig works out, but the risk ratio is always high on these arrangements.

Shawday has some great points laid out for you. The risk of foreclosure is always there and guess what? If the owner gets foreclosed on, you've lost your home and your money. The bank isn't there to honor the arrangement you made with the seller. It's not uncommon for the seller to disappear either.

I don't want to scare you, but these are real things that have happened to real people - right here in San Antonio. Texas as a whole looks down upon these arrangements but they are not illegal.

Some things to note:

Typically with a lease-purchase your rent is basically a ballon payment loan. You pay each month just like a mortgage, but without title (ownership) of the property. At the end of a prescribed amount of time, usually shorter term than most home loans, the rest of the balance on the loan is due (what's called a balloon payment). Most lease-purchase agreements come at a high interest rate (last few I've seen were running at 10%), so while paying those monthly payments, you're usually not making much of a dent in the principal of the loan.

The theory is that whatever it is that prevents you from getting a loan and purchasing a home will be resolved in the term of the lease-purchase option - bad credit, cash, etc. If those problems aren't resolved and you're unable to mortgage the balance or pay it off, you wind up having paid some expensive rent and once again have no home to show for it.

Obviously I don't know the particulars of why you wish to pursue this path, but if you haven't already, perhaps speak with a loan officer to see just what your situation is. Depending on what your roadblocks to getting a loan are, some may be fixed easily and quickly so that you may perform a more tradtional purchase in a timeframe that suits you. If the roadblocks are major, you may want to ask yourself if you're truly prepared financially for home ownership.

If you any questions, feel free to ask.

Hope that helps!

Matt Stigliano, Realtor (r)
RE/MAX Access
(210) 646-HOME
1 vote
Dan Chase, Home Buyer, Texas City, TX
Sat Mar 6, 2010
Below is a blog I wrote. It is things that should be found out about a house or land before you buy it.
Renting to own is slightly different, yet it will want to know about a lot of the same things.

Other things to consider to try to minimize unexpected expensive problems when buying a house are below.
0 votes
Jana Halvers…, Agent, San Antonio, TX
Sat Mar 6, 2010
I would recommend you find a for sale by owner and let the owner carry the note while the ownership is legally transferred so you don't take the risk of making payments on something that may or may not get transferred to your name. I've had several horror stories told to me of how individuals have lost their investment due to death of the owner, unscrupulous acts by the seller, etc.
Web Reference:  http://www.janaworks4u.com
0 votes
Danny T Thom…, , Austin, TX
Sat Mar 6, 2010
Rent-to-Own -- be very, very careful. Make sure everything is clear. According to the law, you are either RENTING -- OR --- BUYING. There really isn't a legal way to "rent-to-own" per se.
The Texas laws call virtually anything where you gain ownership incrementally or otherwise "a purchase". If it is a purchase, it needs to be done properly, which means you need a real estate attorney. There are owner wrap-arounds, contract for deeds, and owner finance methods. All are legal but only under very specific guidelines.
If you are renting with a promise to buy at some point, but are not gaining equity or any implied ownership... then you really are just renting. You will not have the tax benefits or anything else owners benefit from. That would really be a Lease-Option, where by some method you acquire the OPTION to buy at some point. Then, you may not need a lawyer, just proper forms to dictate the terms of the lease, and the terms of the option.
BUT - if at any time there is an implied or express interest of ownership conveyed to you - that is a legal conveyance and you had better get an attorney fast....

Web Reference:  http://CallDannyT.com
0 votes
Stephanie K, Agent, San Antonio, TX
Sat Mar 6, 2010
This is an interesting question, since in Texas our laws really don't want the real estate community handling these transactions, yet the internet is absolutely full of ads touting lease to own homes. If you decide to go this route, you will need an attorney to draw up the paperwork since we have no promulgated forms for lease purchase.

What is motivating you to do a rent to own? Some people prefer to venture in this direction while they clean up credit issues, others just don't have enough for a down payment.

In order for you to qualify for the tax credit, you would need to be under contract to purchase by April 30, and closed by June 30 and I don't think a lease option is going to qualify, since technically you would still be leasing the house on June 30. I dont believe the IRS site mentions lease purchase and contract for deed is extremely questionable in Texas. Please be sure to verify that with a tax attorney and the attorney that draws up your lease purchase. If you are eligible, that credit could be as much as $8,000, depending on your income.

If you are just wanting to get into your first home, and you have credit issues or not as much of a down payment, you might find someone willing to do owner financing. There are also a very few programs that still offer 100% financing if you have good credit. Remember that in a lease purchase only a portion of the rent goes toward the purchase.

A good first step is speak with a lender. Even if you decide to move forward with a lease purchase, at some point it is going to be a purchase and in all likelihood, you will need a mortgage. You can check out my website, listed below for a list of lenders, or just talk to someone at your bank or credit union. They will be able to give you advice on taxes and insurance and what the total costs will be and even how changes in the rates will affect your payment. With all the incentives that are being offered and the best mortgage rates in almost half a century , it's agreat time to buy, but other than locking in your price, I'm just not sure about the lease to own. More general information on lease to own can be found at the link below.

Stephanie Kelley ABR, CRS, GRI
210 867 8743
Keller Williams, Legacy
0 votes
Alma Kee, Agent, Tampa, FL
Sat Mar 6, 2010
You should also be sure your contract is written to comply with the IRS rules so you can get up to $8k free Tax Rebate. This is from the IRS's website:

Q. Can a taxpayer claim the first-time homebuyer credit if the purchase is pursuant to a seller financing arrangement (for example, a contract for deed, installment land sale contract, or long-term land contract), and the seller retains legal title to secure the taxpayer's payment obligations?

A. If the taxpayer obtains the "benefits and burdens" of ownership of a residence in a seller financing arrangement, then the taxpayer can claim the credit even though the seller retains legal title. Factors that indicate that a taxpayer has the benefits and burdens of ownership include: 1. the right of possession, 2. the right to obtain legal title upon full payment of the purchase price, 3. the right to construct improvements, 4. the obligation to pay property taxes, 5. the risk of loss, 6. the responsibility to insure the property and 7. the duty to maintain the property. (7/2/09)
0 votes
Kathy Weber, Agent, Murrieta, CA
Sat Mar 6, 2010
My advice would be to consult a Real Estate attorney first.

Everything would need to be written in a legal contract to cover you and the seller.

Second, I would talk with your CPA to find out any tax pro's or con's.

You don't want to pay monies on a "lease" option and then not have it written up properly. i.e. the seller keeping the monthly mortgage payments up until the sale of the property, etc.

Good luck!
0 votes
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