How can you buy the house you're renting?
Rent-to-own arrangements can help people make the transition from tenant to homeowner, but how to go about it? In a sagging market, a lease-option offers the most flexibility.
Question: We want to purchase the house we're renting and have an oral agreement with the owner to do so. We believe that now is the time to go ahead. How do these deals work?
Answer: Your folks might remember that old Burt Bacharach song, "Promise, Promises" and its lyrics that lament, "Those kind of promises take all the joy from life." Well, they'll surely want to get that oral promise in writing, assuming it's still a good one. I suspect it will be, particularly with the market dragging along in most regions. In fact, the owner may be a little sorry he didn't try to establish a fixed future purchase price for the house before values went south. Owners are sometimes content to keep those agreements at an oral level so they can see which way the market is heading without making a real commitment. (Bing: Find rent-to-own lease forms)
Right now, the leverage is probably in your hands. But before you get this pact in writing, determine the type of rent-to-buy arrangement you want to make. I strongly suggest a lease-option arrangement in which you will retain a legal option to buy the property at a set price after a given period, not an obligation to buy it. This affords more flexibility in case your circumstances change, as circumstances are wont to do. A rent-to-own arrangement, also referred to as "lease-purchase" or "lease-to-own" deal, is generally a binding agreement for a renter to buy at the end of a set period.
Rent-to-own arrangements are generally structured so the renter/buyer agrees to pay above-market rent (20% and up) over a period ranging from one to three years in order to accumulate the equivalent of a down payment. Thus, if you are paying $1,200 per month in rent, you may be asked to boost that to $1,500 per month for, say, a 30-month period, thus accumulating a $9,000 "down payment" in that period. Typically, the buyout price at the end of these deals is at least 110% of the price the owner originally plunked down for the house.
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An advantage of rent-to-own deals is that lenders generally require little or no additional down payment and may allow assumption of a mortgage that you may not have been able to get on your own, particularly if you suffered past credit problems. Make sure you get a few "comps," or comparative prices of homes that recently sold in their neighborhood, to give them a foundation for your offer. Realtor offices are pretty good about releasing some of these because they're hoping to get your business.
The good thing about locking into a price now is that most markets are flat. That might make the current owner apprehensive about trying to build future appreciation into the lock-in price. Remember to try to get a lease-option instead of a lease-purchase. It is a buffer against the unknown.
Here's wishing you the joys of future homeownership.
Mathews Realty Group
Self Directed IRA Specialist