As I drive around in my market I tend to see homemade signs posted at major intersections with houses advertised as “Rent to Own”. In this post I’d like to layout a typical rent to own deal as well as show how the unscrupulous can take advantage of an unsuspecting buyer.
First terminology; rent to own is the same as a lease purchase. It is a combination of a lease and an option to buy a house for a certain price. This type of deal attracts people who are not quite ready to buy but are willing to bet that they will be able to purchase in a relatively short period of time. Most of the time the attracted buyers are either just getting started or are starting over after a bankruptcy or other credit issue.
Here are the main features of the deal:
- Buyer and Seller agree to an option price and the time for which the option is good (usually 3 years or less but is negotiable).
- Buyer pays an non-refundable option fee upfront to Seller (usually 1% – 5% of purchase price) . If they exercise the option the option fee goes toward the purchase price of the house.
- Buyer agrees to pay monthly rent to the Seller. Usually, the buyer pays a premium on the market rate rent and that premium also pays down the option price of the house.
Advantages for Seller:
- Expands the pool of possible buyers to their house. This is especially helpful in a slow market.
- Option money is upfront and payable to the Seller.
- They can usually collect above market rate rent.
Advantages for the Buyer:
- They are able to lock in a sales price on a house.
- They are able to pay down equity each month they pay rent.
- They are given time to accumulate a down payment, sell a house or repair credit.
There are situations where the Seller is just looking for a victim. There have been many instances where sellers are just looking for the upfront money and premium rent and then find a technicality to evict the buyer/renter before the option can be exercised.
The deal can get sour quickly if the buyer cannot perform. The good news is that the Seller ends up with some money but they also have to ask the Buyer to move out and deny the pleas for an extension. The other variable is the condition of the house. If the Buyer can’t make the deal work they won’t necessarily keep the house in great condition. Something to think about.