The Deal with "Rent to Own"

In this crazy market and economy, it is the growing consensus that renting will be here to stay.  More and more Americans will be forced to rent: a. because they suffer from some sort of credit deterioration due to lack of payment or foreclosure because of financial circumstances or b. because they simply don't have the resources for a down payment and a monthly mortgage.


That being said, truly if you have great credit, and cash in the bank.  NOW is the time to buy.  With mortgage rates at an all time low, and falling home sales, there is no better long term investment.  Why pay someone else's mortgage, when you could be paying into your own??


An option that often comes up with renters is "Rent to Own".  I can't tell you how often I hear from prospective tenants . . ."Oh but would definitely consider renting with the option to buy".  And vice versa from the Landlord side.  People feel like this is a great bonus for the opposite side.  However, truly "renting to own" has been so rarely done in the past years, no one really knows what is entailed.


What is needed is this:


1.  The person renting with the idea of buying will need to come up with a substantially large NONREFUNDABLE deposit.  The reason for the deposit is honestly so the renters have some skin in the game and don't just up and walk away if they change their minds.  This keeps them invested and obviously protects the landlord.  If they back out, the landlord keeps that deposit!


2.  A month rate needs to be agreed upon by both parties as to how much will go towards the actual payment of the property on a monthly basis.  For example, the monthly rate agreed upon in the lease is $1000 as it stands.  This rate is the amount the renter pays currently to the landlord to cover all the expenses pertaining to the property: upkeep, mortgage, etc.  Those expenses will not go away just because it becomes a "rent to own" situation.  Therefore a NONREFUNDABLE amount above and beyond needs to be decided upon that will go towards the purchase, for example $200/month.  So, $1000 would still need to be paid to cover the cost of running the property, plus the NONREFUNDABLE $200 to go towards the purchase, increasing the rent to $1200/month.


3. A time frame and cost for the property needs to be decided on and agreed on in writing.  So, for example you decide that $200/ month will go towards the purchase price for 5 years.  In that 5th year, you will apply for a mortgage and buy the property outright for $200k.  Ok, well the danger in that is this.  As of today let's say, the property is worth $200k.  In five years it is worth $400k(wouldn't THAT be nice).  Well whoo hoo for the buyer.  They would be getting an amazing deal, and the seller . . . not so much.  But look at the reverse, in 5 years the property is worth $130k.  As a buyer, you would really be taking a huge hit, and the seller would definitely be making out.


All and all, it is a gamble.  For people who want to own a home who are really struggling from the aftermath of bad financial situations, like bankruptcy, foreclosure, is this a viable option?  No doubt!   But like anything else in this world, being forewarned is being forearmed!  Ask LOTS of questions, and go into it with your eyes WIDE open to the risks involved!!


~Pierre