what is rent to own how does it work?

Asked by Jeannette, Chicago, IL Wed Sep 17, 2008

what do i need to start and is it worth it how long does it take

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Torrey Lewis, , Chicago, IL
Thu Sep 18, 2008

Our office has dealt with a number of rent-to-own scenarios, and they all have their own twists. Unfortunately, there is no standard when it comes to a rent-to-own situation. Each one is unique.

The points that need to be hammered out in negotiations are typically as follows:
1. How long will the lease be before the purchase. I have typically seen 1-2 year lease terms.
2. How much, if any, of the rent will go towards the down payment. Generous owners have allowed as much as 50% of the rent to go towards the down payment. Owners not as generous have allowed only 10%-20%. You will need to verify where and how this money will be held by the owner. Many times, lenders will not allow sellers to simply "credit" the money to you at closing. As the buyer, you should insist that it is held separately from any rent and/or security deposits in its own escrow account.
3. By when will you need a mortgage approval. This will tell the owner whether or not you will be able to purchase the unit, or whether you will simply be forfeiting your escrow back to the owner as rent.
4. When the property will be inspected and/or in what condition it will be in at closing. Remember, buyers will be living in this unit with the intention or purchasing it. Sellers may require buyers to have your inspection prior to your initial move-in, at which point the buyer may be responsible for any and all repairs.
5. What the purchase price will be. Most of the time, the price is locked in upon lease commencement or the signing of the contract. Rarely, I have seen buyer and seller agree to a purchase price of the appraised value sometime closer to the actual closing.

To try to briefly sum the transaction up: The buyer and seller agree to a lease price, a sale price, security deposit, and lease term. Some portion of your rent will be deposited into an escrow account for you to use at closing (it's always best to use separate checks for the amounts). The buyer works towards getting lender approval for the deal throughout the lease, or as is needed. At closing, the buyer will then have, basically, a savings built up to use for the down payment. Additional monies may be needed, depending on the terms of the loan. Typically, if the buyer breaches the lease in any way, or if they cannot secure financing to close, the escrow monies are forfeited to the seller.

I would STRONGLY recommend that you use a good real estate attorney and a good Realtor who has some experience with these types of transactions. This is only a brief summary of what can be a complicated procedure, since there are no established standards.

Good Luck! I hope this helps!
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Dan Mengedoht, Agent, Charleston, SC
Wed Sep 17, 2008
Jeannette, this has already been answered in this thread: http://www.trulia.com/voices/Home_Selling/How_does_rent_to_o…

I will paste in my prior answer which was praised in the thread as being very right:

OK. To actually anwer your question, from a lender's standpoint, the cost to rent similar property in the same market is determined by an appraiser. Then, any amount paid in excess of this is credited towards the purchase in the form of a credit towards the downpayment. For example, 3 bedroom, 1500 sf homes in the area rents on average for $1000 per month. If the renter/buyer pays $1500 per month, then $500 per month is credited towards the purchase. It must be a minimum 12 month lease.

To be honest, I have never worked a deal like this, but this is my understanding of how it works. There may be other variations or opinions, and definately more details to learn, but I do hope this helps.

Best Regards,
Dan Mengedoht
Web Reference:  http://www.CharlestonDan.com
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