Rent to own: A good solution for a troubled housing market? (© VStock LLC/Tetra Images/Corbis)

With credit as tight as a drum, a rent-to-own option would seem a perfect solution for many buyers and sellers.

Cash-strapped buyers would get a chance to save for a bigger down payment or make themselves more creditworthy. Financially strapped sellers would be able to get out from under a house, with someone else paying the mortgage and eventually taking it off their hands.

But these arrangements often work better in theory than in practice, attorneys and real-estate agents say.

"It can be a nightmare on both sides" if one party doesn't fulfill its end of the bargain, says Doug Malan, managing partner with Las Vegas law firm Deaner, Malan, Larsen & Ciulla.

How they work
Traditionally, lease-purchase agreements have been executed by an owner interested in giving a long-term tenant a shot at homeownership or those interested in expanding their pool of buyers in a tough market.

You can often find this option on a home's multiple listing service (MLS) description, with the line, "Seller will consider a lease-purchase." It also can be found in a home's advertising or marketing materials.

Typically, a potential buyer will agree to a set lease term, with an agreed-upon date at which he has an option to purchase the home, either for a specific amount or by some agreed-upon method of determining value.

The renter will pay some kind of consideration upfront for the right to buy at the end of the lease, such as a nonrefundable deposit of several thousand dollars.

However, these days, says Joe Manausa, broker-owner of Century 21 First Realty in Tallahassee, Fla., underwater owners are taking far less upfront for this option, giving renters less to lose if they decide not to buy the property.

"Now, with a flood of inventory, they are just lucky to get (any consideration)," he says. "Most sellers, by the time they consider a lease purchase, are well into the desperation period."

The risks
Of course, these agreements are not without huge risks for both sides. Buyers can pay, only to find that the owner has stopped making his mortgage payments during the lease term. And owners can wind up with a deadbeat tenant who has no interest in completing a purchase.

That's what happened with real-estate agent Viji Sashikant's client six months into a lease on the client's house in Columbia, S.C. After trying and failing to get a loan to buy the property last fall, a bidder on the property asked Sashikant's client to lease it to her for six months, while she polished her credit.

He agreed. But the tenant's credit score got worse after she moved in and she skipped out, changing the locks and demanding her $5,000 back. Only now, three months later, are Sashikant and her client regaining access to the property to try to lease it again or put it back on the market.

"I will never do a lease-to-own again," says Sashikant, of ERA Wilder Realty. "If (a seller) can't get the right price, I will just advise them to rent it out for a year or two. That is the cleanest way to go."

Indeed, another lease-purchase agreement she worked on for a different client also looks to be on shaky footing, she says, with the renter making demands for repairs but not agreeing in writing that they were done to her satisfaction.

"Most of (these agreements) don't even make it to the closing table because they are not crafted correctly," Manausa says.