How hard is it to rent with the option to buy?

Asked by Dave, 33460 Thu Apr 25, 2013

My mother has been a renting for several years now, had the opportunity countless times to own the condo where we live, but she never did.

She's been exploring the option of moving to a single family home, but she's still very hesitant to buy. She wants to find a house where she feels at home before she makes the commitment to buy. What are the requirements for this type of purchase and is it only reserved to certain types of homes?

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Trevor Curran, Mortgage Broker Or Lender, Great Neck, NY
Fri Apr 26, 2013
Good afternoon Dave,

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.
1010 Northern Blvd. Suite 234
Great Neck NY 11021
Licensed Mortgage Banker – NYS Dept. of Financial Services

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2 votes
Mack McCoy, Agent, Seattle, WA
Fri Apr 26, 2013
No, Dave. It's reserved for a seller who can't find a buyer at their price, so they dangle terms in front of the desperate hoping that the buyer can't exercise their option and they can pocket above-market rents AND the option money.
1 vote
Debra (Debbi…, Agent, Livingston, NJ
Sun Apr 28, 2013
I respectfully disagree with Pat - rent with an option to own favors the seller, and is not an option I'd suggest for your mother.

Reread most of the comments below to find out why!

No need for me to repeat the potential dangers that are lurking for a buyer - they are already listed - ) the biggest of which is the loss of one's deposit money)!
0 votes
Pat Halty, Agent, West Palm Beach, FL
Sun Apr 28, 2013
Rent To Own is a great method to make a Tenant into a Buyer.

I am a realtor in West Palm Beach that specializes in "Lease Purchase" and " Seller Finance" transactions. In this market there are many properties that for whatever reason have not sold. Often there is difficulty getting an appraisal due to numerous distressed sales in the area. But property owners and landlords are becoming more receptive to "Lease Purchase" contracts.

When we are working with a "Tenant-Buyer" we are looking at three things.

1. Verifiable Household income- this will be necessary to not only qualify for the monthly rent, but for the mortgage when the Tenant-Buyer is ready to exercise their option and close on the house with a mortgage.

2. Lease Purchase Fee: We require that our Tenant-Buyers have at lease 3.5% of the anticipated sale price of the property. This fee is given to the property owner when the Tenant-Buyer moves in as a renter. This is a non-refundable fee and will convert into the Down Payment when the Tenant-Buyer closes their mortgage on the property.

3. A Credit Score that can be repaired during the leasing period. Often a Tenant Buyer will need to wait 1-2 years to get the required term from a short sale or foreclosure. Or the Tenant Buyer needs to fix some collection or charge off trade lines.

We also encourage our property owners to give a 15-20% rent credit that will be used as a seller concession towards the buyer's closing costs. Rent credits are only given if the rent is paid on time.

This is a "win-win" situation for both the Property Owner and Tenant Buyer. The property owner gets a great tenant that will maintain the property as if it was their own and pay their rent on time. The Tenant Buyer has the opportunity to live in a property that will be theirs some day.

We always encourage all Tenant Buyers to do the traditional due diligence when purchasing the home, including a home inspection and title search. The monthly rent is mailed to a 3rd party escrow company that will forward payment of monthly mortgage, taxes and insurance to guarantee that the property owner stays current.

The key to any successful Lease Purchase contract is to work with a Realtor that is experienced with these type of transactions.

for more information on "Rent to Own" and "Lease Purchase" visit my website

Pat Halty
Team Rent to Own
Siebrecht Properties
0 votes
marc jablon, Agent, Boca Raton, FL
Fri Apr 26, 2013
If you're are looking for a West Palm Beach home on a rent to buy or rent option, there is no rule for the type of home. The only obstacle, and it is a very large one, is finding an owner who is willing to work with you to make this happen.

Also, you will still need to obtain financing at the end of your rent to buy term (usually 1-3 years) in order to purchase the house. You should talk with a mortgage broker to make sure you will be able to qualify. If you know you cannot qualify at the moment, ask that mortgage broker when you need to do in order to qualify down the road. You may want to call Mortgage Broker Call Preston Ware at 561-329-0075

Also, if you find an owner who is willing to lease/option, the owner of that home in West Palm Beach is likely to ask you for a sizeable deposit, in order to make sure that you remain to honor that commitment. The owner will probably ask that your deposit be non-refundable.

That means that if you change your mind later on down the road, or if for some reason you are not able to obtain a mortgage for that Palm Beach home within a year or two of your agreement, then you take a chance on losing that deposit if the owner decides to put the home on the market for sale.

Something you need to determine if you find an owner who indicates a willingness to do this: does this person own the home free and clear, or is this person current on the mortgage? You do not want to run into a situation where you give a large deposit and later find that the owner is in foreclosure.

Today, when many owners are behind in mortgage payments, you need to be careful even about a standard rental. Because if the owner is foreclosed upon, the tenant can also be evicted.

So before you make a rent to buy arrangement, be sure of the homeowner's intentions and financial stability.

Marc Jablon, The Jablon Team
RE/MAX Complete Solutions
0 votes
Tni LeBlanc, Agent, Santa Maria, CA
Fri Apr 26, 2013
Hi Dave,

In my area there are very few of these opportunities. In fact in the past 5 years I have not seen one legitimate offer for a rent to own property. Be very careful and make sure to have an attorney review any agreement your mother is going to sign.

Many of the people that want to sell in my area that are not able to do so, cannot sell because they are underwater on their homes. A rent to own arrangement does very little to solve their problem. So, here we have not seen rent to own as a solution to the housing bubble. In other area, it may be different.

As an agent who has worked with many buyers (and also bought many homes), I can say there is a moment in a home search when people will realize that a house feels like home, usually right when they walk in the door. If people give me an idea of what they are looking for, I can find them the right house that feels like home. I'm sure a Realtor in your area can do the same.

Good luck!

Tni LeBlanc
Broker, Mint Properties
DRE #01871795
(805) 878-9879
0 votes
Terry Farnsw…, Agent, Lisle, IL
Fri Apr 26, 2013
Hi Dave,

"Rent to own" homes are reserved to typically only a very small portion of the properties available. This may vary in your market of course, as I can only speak for the Chicago area. These homes are typically geared towards people without sufficient income, or credit, to qualify for a mortgage - but "plan" on being able to qualify "down the road" at some point. While they are advertised as "rent to own" they should really be called "rent to save up a down payment" because in essence that's what they are. In return for the owner essentially "holding" the property for you, while you rent it and improve your finances - you get to assume a lot more risk than the average tenant would. Personally, I would not recommend your mother get involved with one of these, however if you do - I've laid out some of the general details below.

Lease to own homes are laden with pitfalls for the buyer and an exceptionally bad idea in my opinion. They are not an easy way to buy a home without having the sufficient credit, income, and down payment to do so, as most people seem to believe. Here are some reasons why they are a monumentally bad idea:

1. You'll still have to typically come up with a lump sum (essentially a down payment) or "option" to enter into the agreement. This is due upfront and is usually a percentage of the purchase price. Plan on a certain percentage of the purchase price (1-2%), which can amount to thousands depending on the price of the home.

2. You'll agree on a date when you'll have to exercise the option to buy. Let's say 2 years from now. At that time, you'll still have to qualify for a loan, and have sufficient down payment.

3. If you pay the rent late even once, the seller typically reserves the right to keep everything and void the deal.

4. How do you know the price you negotiate down the road will still be a good deal when it comes time to actually purchase the property? Will you qualify for the financing then? Will it appraise out?

5. You'll be responsible for the upkeep of the property throughout the life of the lease. If the furnace goes out, you'll have to fix it. Same for the roof, plumbing, and everything else. Remember, this is for all intents and purposes now "your" house.

Violate any of the above terms and the seller keeps everything you gave them upfront, and also all of the money credited towards your down payment from each month.

Too much risk, too much money, and too much uncertainty about what your situation or finances will be too far down the road in the future, in my humble opinion.

My advice would be for your mother to simply do a traditional 12-24 month lease, until she is confident that the area is where she wants to settle down & stay for the long term, then purchase using traditional means after that if still interested. You could always ask the owner if they would be interested in possibly selling at the end of the lease, without having to enter into an option agreement that is going to saddle her with extra risk.

Hope this helps!
0 votes
Michelle Sad…, Agent, Boca Raton, FL
Fri Apr 26, 2013

In my experience she would have to do a rent with option to buy in the contract to rent/lease. I have not seen many out there that offer that type of option, but I am sure it does happen with the right property. Sincerely, Michelle Sadownick, Posh Properties 561-633-1020
0 votes
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