Rent to Own

Signs on telephone poles which proclaim "RENT TO OWN" entice people who are unable to qualify for a mortgage.  Sometimes these programs are legitimate and sometimes they are not.

Another name for "rent to own" is lease option.  The lease option is really two agreements combined together.  The first agreement is a lease like any other rental agreement.  The lease defines how much rent the tenant will pay for what period of time.  The second agreement is the "option to buy" agreement.

The option agreement is really a contract to make a contract.  The contract "creates a right to buy, sell or lease property for a fixed price during a set period of time." (Minnesota Principles of Real Estate by Rick Larson).  If the buyer is renting the home, the owner and renter may make an agreement that the renter can buy the property for XYZ price by a specific date.  The price is already negotiated.  The date that the renter must complete the purchase is also already defined.  The option to buy agreement binds both the buyer and seller to the purchase price and time.  The seller cannot sell his property to another party until the option to buy expires or is released in writing.  The option agreement is supported by valuable consideration (money, other property, chattel, or a promissory note).  In other words the buyer has to pay the seller something to enter into the option agreement.

Even though the option agreement does not create a legal interest in the title for the buyer, the option agreement is still enforceable if the seller dies.  The buyer can still "exercise" their option to buy the property under the agreed upon terms.  The sellers' heirs would have to abide by the written agreement.

There are many variations on the lease option or rent to own scenario.  Some private investors will allow a tenant to rent on a "rent to own" basis without a large up front amount.  The investor might collect as little as $1,000 up front and then charge a monthly amount as part of the option/down payment for the buyer's future financing.  Rent might normally be $1,000 and the person buying might end up paying $1,500 each month with $500 being placed in the investor's account as part of the option payment and/or future down payment toward the purchase.  The extra monthly amount would be lost if the renter does not perform on the purchase of the property within the time frame.  This kind of scenario is why I am hesitant about rent to own programs.  The renter might be better off paying less rent and working with a mortgage officer or credit counseling agency to clear up their credit problems with the extra $500 each month. 

There are some lease option programs that are legit.  However, if it sounds too good to be true, it usually is.  As the saying goes, "There ain't no such thing as a free lunch." 

(c) Bonnie Erickson 2006

Comments

[Bonnie Erickson]

August 13, 2006

I'm in total agreement with you, Judi. That's why I said if it looks too good to be true, it probably is. Waiting 6 months to clean up credit and using that extra money that the investor is collecting to save for a down payment, closing costs, or to clear up some credit issues is a much better scenario in most cases. I know of a couple savvy investors who sell on rent to own and wait and hope for the buyer to be delinquent so they can sell to another culprit and collect another big down payment. I also know a few legitimate rent to own investors who see this as an opportunity to sell their house and avoid paying large capital gains tax. It truly is a buyer beware scenario which is why a REALTOR is a good place to go for advice.

[Judi Brooks]

August 13, 2006

This scenario is in many cases a scam. Savvy investor\'s preying upon buyers with sub-prime credit or other issues. Shame on them! Savvy Investor holds all the cards (and the Buyer\'s money) and the Buyer holds all the risk. Savvy Investor can rest easy knowing the property will be well taken care of (they are buying it after all). Savvy Investor knows there is a high likelihood that the Buyer\'s credit won\'t improve by the end of the contract. Savvy Investor will typically ask more than market value for the property, making the purchase a bad investment for the Buyer. Savvy Investor may have added default clauses (in fine print) to the contract which might render it null and void at term when Buyer has the option to exercise the right to purchase. My advice to anyone thinking about such a lease option is find a good Realtor! A good Realtor knows a good Banker (or twelve) that will help with whatever issues that need clearing up. A good Realtor knows the market. Thus protecting the buyer from making a bad investment.