Rent To Own | Lease Purchase | Purchase Option
…a rose by any other name, right?
Here’s the reality about renting to own a house.
Q: What is rent to own?
A: It’s a contract that allows you to “rent” property for a while that you will ultimately purchase for a predetermined price.
Q: How does it work?
A: Let’s say that I’m interested in renting to own my house. For simplicity, my house is paid off and I am going to let you rent-to-own it. Currently, my home could attain $1,200 per month for rent. I will charge you $1,700 per month to lease my home for 60 months (five years) with the intent to sell it to you for a reduced price at the end of the term. So, here’s the math:
Current Market Value: $150,000
-deduct $500 per month paid towards potential sale ($30k)
At the end of the term, the $30,000 extra that you have paid will be used as a down-payment on a potential mortgage that you will secure with a lender. In some situations, the homeowner will owner-finance the house where they continue to act like the lender and charge you a premium until the house is paid for…but…sorry buddy, i’m not that lender.
Q: Why would somebody buy a house this way?
A: It’s appealing for a buyer who might not otherwise be able to buy a house, whether it’s the lack of a down-payment, or spotty/bad credit. This allows the buyer to work on improving their credit and build up a down payment. Another benefit is that the buyer has the opportunity to live in the house before committing to ownership.
Q: Why would somebody sell a house this way?
A: Many reasons. It’s possible that the seller doesn’t want to work with realtors. Another reason is that a particular home might not sell on the market at a price the seller desires due to needed repairs or the home being out of code.
Here’s another benefit for the seller: They can market to renters (not pre-qualified home buyers) who are less educated about the home buying process, have a smaller pool of homes to choose from, and may be more lenient about issues with the property. It also will allow the seller to collect more money per month than they would through a traditional tenant…which the seller is entitled to keep if the buyer does not eventually buy the home.
Q: Why wouldn’t Man Vs Cash buy a house this way?
A: There’s no guarantee that you will be able to afford the home, or qualify for a mortgage, when the lease expires. If your income changes, or you don’t have a savings put aside, you may have to move out and forfeit all the rental premiums you paid during that time.
Another thing to consider is that your original agreement is based on market values at the time that you signed. If the home gains substantial value, you are in the clear, but the seller probably has an idea of their property value trends…so there’s a big chance that the home could end up costing more than it’s worth, causing you to abandon the agreement and lose your cash.
Q: Okay, I don’t have a down payment. How do I buy a house then?
A: If saving a down payment (my true advice) isn’t completely feasible, then I suggest looking into down payment assistance programs. Many areas of the country offer government backed programs for first-time buyers that can fund your down payment or eliminate it altogether.
Also, many lenders offer first-time buyer programs that require very little money down. Check out some local lenders near you to see what they can offer before you start looking.
Q: What do I need to be thinking about if I’m going to buy a home?
A: I wrote a whole post on the hidden costs of home ownership that you can check out right HERE.
Also, as a final note, if you’re buying a house… you can use a real estate agent for FREE. The sellers are the ones who pay for both agents (theirs AND yours), so be sure to get an agent to protect your interests and fight your battles. I have an entire post on why a real estate agent is a must… HERE.