Rent to own: A good solution for a troubled housing market?
This homebuying option can be a win for both sellers and buyers in some situations, but only if everything goes as planned.
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."
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.
Each situation is different, and laws vary from state to state. Remember to always seek legal advice (for this type of case you need a lawyer specialized in real estate). As a realtor I always Suggest my clients do. At this time the Laws Are Changing constantly. And remember that there are still good opportunities to buy.
Good luck in finding legitimate ones. Most are still trying to suck the system for what it can get.
Better off acquring property and putting sweat equity into the dwelling.
I was excited about getting a house for the first time but couldnt go thru bank. Went to restate office gates and burns and they found me a house and after
3 years it was a nightmare . I paid my payment every month (early ) . it was
a 10 year contract and there were does and donts. well i did my share but
the seller didnt. Im know in a complex until i can find a seller i can trust. Topped
everything the owner of gates and burn was friends with this idiot. I lost
$15,000 only had 7 more years togo. I've been gone 2 years from the propety
and he's had 3 other familys in and out. i lived there almost 3 and 1\2 and the
house was empty for 4 years before i took it. now i have nothing to show. so
think about it before you do it. because it can be costly..
Three years ago, my wife, the lovely Mrs. HOA Guy, and I purchased a new Townhome. Our developer/builder was doing some lease-option deals at the same time. Unfortunately, with the dropping real estate market, the homes went down in value and none of the proposed purchasers were able to complete a deal. 13 homes went into eventual foreclosure for about $75k less than originally listed, and the bank sold them for about $20k less.
The important thing to remember is that a lease-option is only a lease until the option is exercised. If your homeowners association has a lot of rentals already, lease-options can put it over the percentage allowed for buyers to be able to access Fannie Mae or Freddie Mac mortgage financing. If the HOA has a cap on the percentage of rentals, these do count against that percentage.
Well I am sure The National Board of Realtors would argue against this option. A traditional mortgage is fine if everything works too. So I really fail to see what the question or focus of the article is here. In Europe in many nations you have up to four, count 'em, four generations living in a home. Sometimes these homes are miniscule in size when compared to the American definition of a "small or starter" home. They do fine. They are used to it and costs are split amongst the generations and it makes for a closer knit family unlike here in America.
There is one thing this article miserably fails to point out and that is the fact that is the American population continues to be unemployed or under employed by a large majority home values will mean zippo. People can't buy what they cannot afford and that is evident today with 3.6 million homes vacant on the market and off with many more expected to go to foreclosure in the next three years.
So I say to all those in need of a home, do what has to be done to buy and to sell and the heck with what these "spur of the moment" experts spew. Remember it is these very same experts that prior to 2007 were telling us to buy as many homes and properties as we could leverage because real estate values NEVER go down!