Mar
30
Rent to Own: It’s Just Catchy Sales Line
Posted by Arlene Skinner under For Buyers, General Information, Ask a REALTOR, rent to own, buying process, renters, foreclosure
So you are interested in buying. You see signs everywhere that says, “Rent to own!” Pretty attractive right? I’ve been approached multiple times by rental as well as buyer clients of mine regarding this option. Here is why I believe “Rent to Own” is just a catchy sales line.
The Process:In an ideal Rent to Own situation, this is what happens:
- The seller is selling an option to buy the home.
- So, the renter “buys” this option with an earnest money deposit. He/She then signs a contract in which the he/she agrees to buy the home for a specific amount within a certain time period. Sometimes, an arrangement is made where a portion of the rent is considered part of the down payment along with the earnest money deposit.
- The renter moves in and within the given amount of time, he/she works hard at coming up with the rest of the down payment, improves his/her credit score and qualifies for a loan to buy the home.
- They then open escrow and the home buying fun starts. 30 days later, money exchanges hands and the renter is new homeowner.
We’ll use Susie as an example of this:Susie rents a house for $1100 a month. The seller gives Susie the option of purchasing the home for $1,000. This $1000 will also be considered part of the earnest money deposit. She likes the idea so their REALTORS(R) draw up contracts. Susie will be purchasing the home for $100,000 in two years and $100 of each month will be considered part of the down payment along with the $1,000 deposit she paid for the option. Everyone has signed the purchase agreement and ready to go. For two years, Susie paysProblems:Since we do not live in an ideal economy, let alone, an ideal “Rent to Own” situation, a number of things could fowl up the above scenario. We’ll use Susie as an example again:
- Susie may change her mind about the home due to crime rate, needing to relocate for a job, loss of a job, or lifestyle changes such as deciding to grow a family. If this happens under such a contract, Susie could lose her deposit.
- Susie may not qualify for a loan to purchase the house in the given time frame. Again, Susie would lose their deposit.
- If the value of the home goes down in the allotted time frame, chances are, the bank will not approve a loan for the agreed upon price. Susie may have to come up with the difference out of pocket which a typical renter in a rent to own situation may not be able to do.
- And lastly, just because Susie is paying rent does not mean the landlord is paying the mortgage. This is happening more and more, landlords who are upside down on their property get overwhelmed and let the house get foreclosed upon. Susie who has been paying rent this whole time gets served a 30 eviction notice due to default on the landlord’s end. What happens to the deposit. It’s gone!
My Solution:Set yourself up so that you can purchase a home in your time frame. Here are a few ways to alter this situation to serve you best:
- Put your deposit in a CD (Certificate of Deposit) or some type of savings that is not as easy to touch. With time, and compounding interest, it will grow. Make it grow faster by CD laddering.
- Have your REALTOR(R) negotiate your rent down the difference that would have gone toward the down payment. In our example Susie’s contract allotted $100 a month go toward the down payment. Instead, try to rent a house at $100 less than your budget.
- Take that difference (our example $100) and have it automatically transfer to a savings account that you will eventually roll into a higher yielding savings.
- Improve your credit.
- When you’ve got everything in line, call your REALTOR(R) its time to buy a house!
Oftentimes, we can’t believe in things that sound too good to be true. Owning your own home is possible with a little work, a lot of perseverance, and the right resources. Call your REALTOR(R) today to see if “renting to own” is for you!
Comments (0)