Is it hard to get a rent to own single family home?

Asked by Crystal, Chicago, IL Wed Dec 28, 2011

Is there a certain amount you have to put down, or is it just like renting where you put down security deposit and first month rent?

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Arlyn Tratt’s answer
Arlyn Tratt, Agent, Skokie, IL
Sun Nov 25, 2012
I have a great rental program that is just rolling out now.
It's great if you are looking for a rent to own, or just to rent.

If you are looking for a rent to own it allows you to have ultimate flexibility in terms, while at the same time it opens you up to both sides of the market.

You can look for homes that are on the market to rent as well as homes that are up for sale If you are looking simply to just rent, it allows you to look at homes that are also for sale.

This opens you up to a whole new marketplace, where the standards may be a bit higher then looking at homes that are simply just for rent.
0 votes
Don Tepper, Agent, Burke, VA
Wed Dec 28, 2011
First, it's all negotiable.

I've done a lease-option (one of the technical terms that covers rent-to-own) with no money down. Usually, there's a non-refundable deposit, often equal to about 1%-4% of the purchase price of the property.

No, it's not just like renting. First, there's the NON-refundable option fee. Second, yes, you do rent. And that's similar to a regular rental. Usually (but not always) you pay slightly more, but some of what you're paying is credited toward the purchase price IF you buy.

Understand: There are two parts to a lease-option. The lease and the option. The lease might require you to put down a security deposit and the first month's rent. But the option usually requires a non-refundable option fee.

There's lots of bad advice below. Briefly:

Those situations are few and far between.
They're incredibly easy to find.

Way better to get a loan and be done with it.
This one's true IF you can qualify for a loan. If you can buy, you're usually better off buying. But most people interested in lease-options aren't in a position to buy today. A lease-option lets you lock in the price today and buy at some point (often 1-3 years) in the future.

To answer your question first, entering into a 'Rent to Own' agreement is essentially signing a contract to purchase.
True if you're talking about a "lease-purchase." That's where you're leasing now and agree to purchase in the future. But much of what's out there are "lease-options" where you lease now and have the option, but not the obligation, to purchase in the future.

The major reason being that you essentially agree to a purchase price and terms one year in advance to actually purchasing. In that time prices can completely change and you may even learn that you don't actually like the home.
First, a lease-option (or purchase) really should be for more than a year. And while it's true that prices can completely change, that's great for you. If prices go up, you've locked in a lower-than-market price. And if prices go down, you haven't bought, only to see your equity (the value of the property) decline. And if you don't like the home? That's fine. You move. You lose your option fee, but that's way less expensive than buying a home you don't like and then trying to sell after a year.

If prices go down, you end up overpaying for a home...not good.
You won't overpay for the home because you won't get financing. The house won't appraise for the higher value. At worst, you'll lose your option fee. But anyone who knows anything about lease-options will advise you on how to protect yourself if prices decline. There are three or four easy ways to do that. It just has to be written into the option. Example: If prices decline, you get your option fee back. Or you have the right to buy at the lower appraised price. Or the option can be extended (at no cost to you) for another 1-2 years. There are lots of ways to handle that situation.

Keep in mind that many homes are available for rent because they are not selling or the owner doesn't want to take a big loss on his investment and he doesn't want to sell for what it's really worth.
That's right. That's why lease-options are so plentiful. A 3 year option, for instance, gives you enough time to get your finances in order. And it gives the market enough time to, perhaps, climb to a point where the owner doesn't have to take a loss when he sells.

Hope that helps.
3 votes
Shannon Fren…, , Baltimore, MD
Thu Dec 29, 2011
Wow, what an interesting thread! Some feathers have been ruffled LOL!

Yes, I would agree that someone should take the "non-local factor" into account when considering advice from someone who's in a different market. However, that doesn't mean their advice isn't valuable at all and therefore they should just shut up and stick to their own market! What kind of closeminded professionalism is that???

The exact same could be said to those doling out advice when rent-to-own is obviously not their specialty or area of expertise! Furthermore, the whole "ask any agent" advice...well, if the majority of rent-to-own sellers don't use agents (maybe because of the attitude that's been displayed on this thread by some), then are they the best ones the ask??? How ironic that a local rent-to-own resource was easily discovered on this thread after it had been said they were few and far between!

Today, I don't care where you are, we're all in a market like never before. Yesterday's rules & ways of doing things most likely won't cut it for many folks. Everyone (tenants, buyers, sellers, agents) have had to adapt to survive let alone thrive. Creative and absolutely legal solutions abound (lease options included). Closing yourself off to constructive input, even if it isn't in alignment with your own personal experience, only limits the possibilities (and your own growth). Who knows, someone's advice may not be exactly right for you or your situation, but it may trigger the thought/idea for the real solution.

Crystal, I don't know your market, but I'd be willing to bet that if you really wanted to find a single family rent-to-own you could. And you most certainly could get involved with the terms of the contract to ensure they are right for YOU. You're already off to a very good start! Wishing you all the best!
2 votes
BJ Tregoning, Agent, Chicago, IL
Wed Dec 28, 2011
Whatever you decide to do, please don't take advice on what to do in the Chicago market from someone in Fairfax, VA (Don Tepper). It is a fact that rent to own properties in the Chicagoland area are very few and far between. You can ask any agent that works in the Chicago area. In addition, the few owners that are willing to do rent to own in this area are going to want to see a pre-approval from a lender for conventional or FHA financing.

Don, stick to answering questions about the Virginia market. What are you doing answering questions in the Chicago market? Does your broker know you are doing this? You are out of your element.
1 vote
Keith French, Other Pro, Baltimore, MD
Wed Dec 28, 2011
Hi Crystal,

It's probably not hard to find a single family home available for rent-to-own (RTO), but you do want to find a company that is doing it correctly and fairly to both the seller, and you, the tenant-buyer. Just like with any service, there are really good companies and those that are not. It's important the transaction be setup properly. If it is done correctly, then it can be a better way to go than renting or buying.

First, you do want to know how your credit looks. How long is it before you can obtain a purchase loan and what if anything needs to be done with your credit before you do qualify for a loan. If you are lendable in 6 to 9 months or less, then you probably just want to wait until you can buy outright. On the other hand, if you need 12 to 24 months, then renting to own may be a great option for you.

Watch out for companies that claim huge rent credits, as logically speaking, how can they provide 25% to 50% rent credits, (unless the seller owns the home free & clear or has a large amount of equity), or unless the home is overpriced and/or the rent is overpriced.

Most sellers are willing to allow somewhere around 10% rent credits, and that is logical if they are only asking current market price for the home and market rent. Find out the current value of a home before you sign a RTO contract and compare that to the seller's asking price (option price). Also, ask if the seller is current on their mortgage payments. The only way to make this transaction work without headache, is for the seller to ask a fair market price (supported by MLS comps), be current on their payments and not upside down on their mortgage, and to charge a fair market rent price.

Here are some of the key positive factors:

1. You get to live in the house that you plan on purchasing now;
2. Most RTO contracts allow you to do improvements to the property (ask if you get a further reduction in the purchase price if you were to do any improvements);
3. If the market value of the home goes up during your rental phase, the appreciation (i.e., increase in equity) should be yours;
4. If the market value decreases during your rental phase, then does the seller have enough equity in the home to lower the purchase price to the appraised value and are they contractually willing to do that; or, if they don't have the equity in the home to lower the purchase price to the appraised value, are they willing to extend your terms and conditions with no rent and/or price increase.

Just think, if you purchased the home, and the market value went down, then you are stuck with an upside down mortgage. At least with RTO, you don't have to purchase, and the owner is stuck with the depreciated asset...not you! Also, if you purchased the home and did not like it after a year, you are stuck with it...whereas with RTO, you can walk away.

Yes, there is typically a non-refundable down payment due upfront plus first month's rent, and if you do not purchase, then you will lose the down payment. Again, if you had purchased, there would be much more severe consequences if the value went down and/or you wanted to move very soon.

Again, remember it's important to have your credit reviewed ahead of time before you do anything and to determine the market value of the home before you sign anything. With a good RTO agreement, the seller should be asking market price, and not charging a premium on the rent. For our contracts, we charge less for RTO than for straight rent, as you did put a down payment down upfront that should count 100% towards your purchase price.

We have lots of frequently asked questions on our website. Feel free to read them before you get into any RTO arrangement.

The best of luck to you!
1 vote
Trusgold, Home Buyer, Chicago, IL
Fri Aug 9, 2013
I jave a low credit score woyld I be eligible for a rent to own
0 votes
Alonzo Abron, , Chicago, IL
Thu Dec 29, 2011
I would advise that you rent to own only if the property is the one you REALLY desire and nothing could top it in your eyes; assuming the lessor gives that option. These deals can be negotiable and usually the lessor ask for a large sum up front (more than a normal tenant) and you may lose it if you don't exercise your option. So you have to be SURE that's what you want and you KNOW you can obtain financing in the future. Like Jim said, most people seek this type of transaction-because they are not eligible for a mortgage from a traditional lender.
0 votes
Edith Karoli…, Agent, Winnetka, IL
Thu Dec 29, 2011
Be very careful, and have Realtor and real estate attorney on your side so that the terms of the agreement truly protect you... Jim Simms blog below will give you some good insights... Read it, educate yourself and then
make sure you have professionals on your side, working on your behalf to protect you.

I am wondering why you would not just rent a single fam. home for the time being?

Edith YourRealtor4Life and Chicago and Northern Illinois/North Shore Expert
Working always in the very BEST interest of her clients, Buyers, Sellers and Investors alike....
0 votes
Jim Simms, Mortgage Broker Or Lender, Louisville, KY
Thu Dec 29, 2011
The reason most people seek this type of transaction is because they are not eligible from a mortgage from a traditional lender. Any work around to side step the mortgage underwriting guidelines shifts the risk from the lender to your side of the ledger, greatly increasing the odds of disaster. The guidelines are actually fairly liberal despite what most people believe. I have linked below some info on rent to own, but there are several other topics on my blog that may protect you. I hope my observations keep you away from harm, good luck.
0 votes
Daniel Sutton, Agent, Jamaica, NY
Wed Dec 28, 2011
That is up to the lessor. Usually they would ask for a security deposit, and maybe 1 or 2 months rent.
0 votes
Jeff Nobleza, Agent, Evanston, IL
Wed Dec 28, 2011
Everything is negotiable in a rent to own situation. Many folks shy away from rent to own as there are many moving parts in such a deal. I represent an investor who owns several properties and would be open to doing a rent to own deal with you if you can show potential to being able to purchase later and we can negotiate an arrangement that is beneficial to everyone. My investor generally works with properties on the North side of Chicago and single family homes in Lake County.

If you are interested in learning more please contact me.

Jeff Nobleza
Baird & Warner - Evanston
2926 Central Street
Evanston, IL 60201
773-677-5340 cell
773-681-7239 efax
0 votes
Matt Laricy, Agent, Chicago, IL
Wed Dec 28, 2011
Rent to own is not a good move and it ends up being a bad decision for both parties. I suggest you either rent or buy a place, not both.
0 votes
Philip Sencer, Agent, Chicago, IL
Wed Dec 28, 2011
Rent to own is not popular or common in Chicago and I do not recomend it. It is never drawn up 'fairly'. Fair, has noting to do with it. The seller is looking to make it favor them and the tenant usually has no clue and gets burned. This market is not about to change much in the next 1-2 years. Just rent until you are able to buy and then just buy.
0 votes
Deborah Smith, Agent, Oak Forest, IL
Wed Dec 28, 2011
This is not a good idea you are signing a contract with a purchase price that might be higher than when the
property closes. You also might find after the amount of time you found something you liked even better or circumstances has changed in your life. Rent now and prepare your self financially by being advised by a mortgage broker on how to proceed in purchasing a home. Debbie Bergthold-Smith-Classic Real Estate
0 votes
Cindy Wilson, Agent, Chicago, IL
Wed Dec 28, 2011
Crystal, the real question is whether it is worthwhile to enter into a rent-to-own agreement in this market. You would most likely have to commit to a sale price now, but the home might not be worth that much when the time came to actually purchase it. You would probably be better off either renting and saving money toward a down payment on the home you really want (at the price you want to pay) or buying a home now when interest rates are a record lows. Keep in mind that many homes are available for rent because they are not selling or the owner doesn't want to take a big loss on his investment and he doesn't want to sell for what it's really worth. Either way, that's not really a bargain for you as a homebuyer. If you need assistance in looking into this more, please contact me.

Cindy Wilson
Koenig & Strey Real Living
0 votes
Jeff Stewart, Agent, Chicago, IL
Wed Dec 28, 2011
Hi Crystal,

To answer your question first, entering into a 'Rent to Own' agreement is essentially signing a contract to purchase. Although every instance is different, a lot of times you are charged above market rate with a predetermined amount being held in order to build up for a downpayment. After a predetermined amount of time (most likely a year) you end up purchasing the home for a price that you and the Seller agreed to at the beginning of the 'Rent to Own' agreement.

With that being said, I will never recommend to a client that they do 'Rent to Own.' The major reason being that you essentially agree to a purchase price and terms one year in advance to actually purchasing. In that time prices can completely change and you may even learn that you don't actually like the home. If prices go down, you end up overpaying for a home...not good.

I would say enjoy renting for the moment and when you're ready to buy, go get pre-approved and search for a home then. You will still find good options and good deal.

Jeff Stewart
REALTOR®, @properties
3101 N. Greenview Avenue, Chicago, IL 60657
309-269-3499 CELL
0 votes
BJ Tregoning, Agent, Chicago, IL
Wed Dec 28, 2011
Those situations are few and far between. Way better to get a loan and be done with it. Talk to a mortgage broker to find out how much you qualify for then find an agent who specializes in the area in which you are wanting to live.
0 votes
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