Rent-to-own in housing works much like a car lease or a rent-to-own furniture deal. The bottom line -- you agree that at a specified time period you will have the choice to buy the home at a set price. However, you, the buyer pays the seller a one-time, often nonrefundable, upfront fee called the option fee, option money or option consideration. This fee gives you the option to buy the house by some date in the future.
“Renting a home or condo in certain cases makes sense, especially when the tenant is short term or was relocated for business to another community. They can write off a large portion of housing if relocated for work,” says Jim Angleton, president of AEGIS FinServ Corp™.
What a buyers needs to know
You might want to rent-to-own for many reasons. Maybe your credit isn’t stellar, you don’t have the money for a down payment or perhaps you want to try before you buy. Is this really your dream house? Well, know that the luxury of this arrangement means not only that you’ll pay an option fee, but that you will pay around 20% above the typical rent for a similar house because some of the money goes toward the purchase of the house.
Like anything, there are drawbacks. What happens if at the end of the rental term you’ve changed your mind about buying, or you’re still not creditworthy to get a mortgage? If you have to walk away, you will count some losses. For one thing, you would have paid extra monthly rent for nothing because it’s not like you’re going to get the money back.
Avoid a nasty surprise. Be sure the agreement doesn’t commit you to buying the house at the end of the term.
Know too, that although you are “renting” you may be financially responsible for repairs and maintenance. Your agreement should spell this out. For example, the arrangement could be that anything under a set amount, say $500 or $1,000 is the buyer’s headache. Any improvements to the property you make are likely not reimbursable.
Stuff happens: If the seller falls on hard times and cannot make the mortgage payments and loses the property through foreclosure, you’re out in the cold. The possibility isn’t pretty. Who knows where the economy might be at the end of your term. If the housing market has taken a downward turn and prices are falling, you may not be able to cash in on it as the seller may not be up for renegotiating, especially for less money.
Hire a real estate lawyer
There’s nothing simple about rent-to-own housing agreements. Get a real estate lawyer to guide you through the process. All sorts of things can go awry.
“Imagine you give the owner $10,000 down (which is all your savings in the world) and pay $1500/mo for a home which would normally rent for $1000. You get a $500 a month credit toward the sale price. You install a new furnace when the old one dies. You build a garage and a deck,” explains James Tupitza, an attorney with Tuptiza & Associates.
Five years down the road you are ready to settle. You discover the sellers have taken out a second mortgage and they are 15 months behind on both the first and second mortgages and two years behind on taxes. In addition, the sellers’ credit card company has taken a judgment for $35,000 which is a lien on the home. “There is ZERO equity in the home; in fact, the sellers are upside down. OOPS,” says Tupitza.