Do your homework and be aware of the pitfalls before you sign anything.
There are many ways a would-be buyer can be led astray.
The want ads practically shout from the pages of Gumtree: “Own a home for $699 a month,” or “Rent to own! No background checks. No credit checks. No questions.”
If you’re struggling either to sell a house or to qualify for a mortgage, a lease-option or rent-to-own deal may sound tempting. In theory, both sides win. The seller gets a series of cash payments and the buyer immediately moves into his dream home, while gaining time to improve their credit rating.
But before you consider entering into a lease-option or rent-to-own agreement, make sure you understand the possible pitfalls. You do not want your dream of home ownership going up in smoke.
Why rent-to-own is best way to own a property in todays market place, NOW!
The declining housing market and tougher lending standards are putting pressure on sellers to help buyers. One tactic is a lease-purchase agreement, under which the buyer rents for a set period of time before exercising an option to purchase the home. It’s especially attractive for sellers in a down market because it locks in a price that otherwise could continue to fall.
A number of sellers, particularly developers, are turning to this alternate method. It’s definitely growing and fast.
Whether called Rent-To-Own, Lease-Option, Rent-To-Buy or Lease-Purchase, all these programs are similar in theory: The renter is buying the right to purchase the house later for a given price. If, at the end of the agreement period, the renter simply doesn’t want to buy, the landlord keeps the money and the house.
Typically, renters pay either a small upfront fee, called an option fee, or finance the option fee by increasing the monthly rent. Usually most, or all of the option fee is credited as a down payment on the house.
During the rental period, the landlord still owns the home and is legally responsible for it, but the renters often maintain the property as their own.
Families get a jump on home ownership………
A lease-purchase agreement let Craig and Lisa of Gladstone, QLD, move their family of four into a house without forking over any cash. All 12 months of rent payments were credited to their down payment when they closed on the house last year.
“It was a good way for us to transition into it, to make sure we liked the home,” Lisa said. “We had an extremely positive experience.”
Among the benefits of Rent-To-Own:
The buyer can evaluate a neighbourhood and property without making a 30-year commitment.
Families can immediately enrol children in a desirable school district.
The buyer can move right in despite credit problems, inability to document income or lack of financing.
The seller gets a tenant with a vested interest in keeping up the property.
The seller receives rental income to cover the mortgage, helpful in a slow real-estate market.
The seller taps a broader market of potential buyers, instead of being limited to those with excellent credit and cash for a down payment.
If a sale goes through, the seller may save on real-estate agent commissions.
Buyers must do their homework………
Rent-To-Own can be a disaster for prospective buyers, too. A typical scenario is that a renter isn’t able to qualify for a mortgage within the time frame in the lease. He loses any upfront payment or portion of monthly rent that was set aside for a down payment.
An unscrupulous landlord may deliberately charge a high option fee and look for any opportunity to cancel the contract, in order to get another tenant into the home and charge another option fee. One landlord with hundreds of properties negotiated contracts that allowed evictions with three days’ notice for anything from late rent to not making repairs. Tenants were responsible for all repairs under $3,000.
There’s certainly opportunity for abuse here. The cost to the renter can turn out to be substantially greater than it would in a straight rental where they would be able to save enough to buy a house.
Any potential buyer should speak to a only qualified people and solicitors in order to make the right decision.
You should be suspicious of anyone who promises that you can buy a home regardless of your credit or how much real estate your income can support. Crunch your own budget to make sure you know exactly where you’ll find the money for rent, maintenance and the eventual down payment.
Ask these questions, and make sure you understand the answers:
Who is responsible for the property taxes and maintenance?
When and how is the purchase price determined? If it’s through appraisals at a later date, who hires the appraiser?
What portion of the rent payment, if any, is credited toward the home purchase? Under what circumstances — such as a single late payment or unkempt lawn — could the contract be voided?
Does the buyer build equity in the property through initial or recurring payments?
Can the buyer get a refund of any upfront payment, such as an option fee? Under what circumstances?
Is the seller serving as the lender, or will the buyer be required to secure a mortgage before the contract expires?
Doing the deal………
Now that you’ve heard the pros and cons, you may feel ready to sell your house through a rent-to-own arrangement, or to buy one. If you’re searching for a lease-option property, Rent To Own Your Home, We Buy Houses or Own A Home can help with all aspects of the transaction.