Rent-to-own deals gain clout in today's market

Situation a win-win for buyers and sellers alike


By Ilyce R. Glink
Inman News

What do you do if you want to buy a home but don't have the cash for a down payment or even the credit score to qualify?

You might try to find a "rent to own" situation where you can lease the property and purchase an option to buy it down the road when you're ready.

When the real estate market was steaming along and sellers had buyers lining up out the door, renters found themselves out of luck.

If a seller can sell a property and get rid of it, why play landlord? It's better to have the buyer's cash in hand and move on. That's why rent-to-own properties were more difficult to find in the last six to seven years.

But now that the real estate market has turned, there are hundreds of thousands of sellers who are desperately searching for buyers. While being a landlord isn't the typical seller's first choice, rent-to-own situations can help a seller turn a renter into a buyer.

Here's how a rent-to-own situation typically works: The renter/buyer agrees to rent the property for a certain period of time. An option to purchase the property at a specific price is agreed to, and a nonrefundable option fee is paid. Sometimes this fee is credited toward the down payment at the time of purchase. In addition, a portion of the rent paid is often credited toward the down payment as well. At the end of the lease term, the renter/buyer decides whether to buy the property or pay another option fee and continue renting the property.

Sellers might like a rent-to-own situation if they've had trouble finding a buyer for their property, and if they can get enough rent to carry the property without losing any money. Often, a renter/buyer will be more motivated to pay the rent and take better care of the property if he or she is seriously considering buying the property at the end of the lease/term.

If you're a first-time buyer looking for a rent-to-own situation, here are some issues you might want to consider:


Companies advertising rent-to-own properties may not be what they seem. If you search Google, Yahoo! or even your craigslist for local rent-to-own options, there are thousands of listings that come up. But if you click through, you'll see that many are developers looking to unload property. Or, they're Web sites that claim to help you find the rent-to-own house of your dreams. Except that once you sign up, nothing happens.


Check out the "houses for rent" and "houses to buy" sections of your local newspaper or Web site. Sellers may not know whether they'll attract a tenant/buyer if they advertise their property for rent or sale. So, they may advertise in both sections. You should also look at some of the more popular for-sale-by-owner (FSBO) Web sites for sellers who appear open to a rent-to-own or lease/option deal.


Ask for what you want. A seller may not want to be a landlord, but local market conditions or his personal finances may force him to rent because he can't sell. As a tenant/buyer, you can ask the seller to fix up items in the house, repaint, and replace or clean the carpet (if the property needs it).


Take the time to explore the neighborhood before you sign on. If you're serious about buying a home, you'll need to seriously think about the neighborhood. That means making sure you're in a good school district, with plenty of shopping, services and restaurants nearby. Is there public transportation and good access? Who is on the streets during the day and evening? While you're renting now, the goal is to turn you into a home buyer.


Negotiate the rent credit and pick-up price before you sign the lease/option agreement. If the landlord/owner has promised to credit a portion of the rent and the entire option fee toward your down payment, get it in writing. You'll want to know what percentage of the rent will be credited and if that credit will earn interest over the course of the year. Do the numbers before you agree to anything. If the reason you're renting instead of buying is because you don't have enough cash for a down payment, be sure to negotiate for a sufficient rent credit so that you have enough for a 5 to 10 percent down payment if you pick up the option to buy the property.


Rent-to-own and lease/options are legal transactions. Before you sign any documents, be sure you talk to a local real estate agent who can help you figure out if the price is right (you don't want to overpay for the property if you buy it down the line). You'll also want to have an attorney review your documents to make sure you're protected. Like any purchase agreement (which is what a lease/option is), you'll want the right to cancel the deal for certain reasons.

When home won't sell, consider 'rent-to-own'

Despite above-market rent, all parties benefit

By Robert J. Bruss
Inman News

You've been looking for months for your first home, or you want to upgrade to a nicer home in a better community. It's a great time to buy a home, everybody tells you.

Finally, you find the ideal home for sale, which has most of what you want (there is no such thing as the "perfect home.")

But when you sit down with the mortgage lender to go over your income and credit to see if you can obtain the home loan you need, the lender says your FICO (Fair Isaac Corp.) credit score is too low to get an affordable interest rate. A mortgage at 7.5 percent interest is the best he can arrange, but he's not sure you can qualify for the high payment.

Will you give up, resigned to waiting a year or two before buying a home? Of course not.

You know the house you want to buy has been listed for sale three or four months so the sellers must be anxious. The eager real estate agent phones to ask if you got your mortgage preapproval. You report the bad news that you're not willing to pay 7.5 percent interest.

Fortunately, you're working with an experienced realty agent. She suggests renting the house for up to two years until you can improve your FICO score. Then she explains you can lock in the purchase price at today's market value. "Tell me more" is your swift reply.

WHAT IS A LEASE-OPTION? Your real estate agent then explains a lease-option, also known as "rent to own" in many communities, is a combination rental, sales and finance technique that has been used by thousands of home buyers and sellers.

However, a lease-option is not the same as a lease-purchase, which obligates the buyer to buy, usually within a year or two. With a lease-option, if home prices plummet, the buyer doesn't have to exercise the option to buy.

Personally, I bought my current residence with a lease-option when I realized I was "cash challenged" without enough money for a down payment. Through my buyer's agent, I offered the sellers a 12-month lease at $1,500 per month with $10,000 nonrefundable option money. As the vacant house had been listed for sale about six months, I asked for a 100 percent rent credit toward my option purchase price, which was just slightly below the asking price.

After hesitating about 10 days, my sellers accepted, but only for a six-month rental term. I readily agreed. Three days later, I hired a moving van and moved into my new home. About five months later, I exercised my purchase option and took title. At the closing, I received credit against the option price for my $10,000 option money plus the $7,500 total rent paid for five months.

Lease-options work especially well when there is an oversupply of homes listed for sale, such as the current "buyer's market" in many cities. When a home seller needs someone to pay enough rent to cover the mortgage payment but doesn't require an immediate cash sale, a lease-option can be ideal.

THERE ARE ALWAYS MORE LEASE-OPTION BUYERS THAN SELLERS. For some unexplained reason, there are usually more "rent to own" buyers than sellers. Having used lease-options to buy and sell houses for almost 30 years, I've learned a properly marketed lease-option can solve problems for both buyers and sellers.

The key to lease-option success is the amount of rent credit the tenant will earn each month toward the down payment. Although I negotiated a 100 percent rent credit when I bought my present home, as a seller I usually agree to only a 33 percent rent credit. As a motivated seller, I've agreed to 50 and even 100 percent rent credits.

Although the lease-option buyer doesn't get any income-tax deductions, the buyer's rent credit is far better, like a "forced savings account." Of course, if the buyer doesn't exercise the purchase option, the rent credit plus the option money is forfeited.

Here is an example of how to advertise lease-options in the newspaper under the "Houses for Sale" and "Houses for Rent" classified ad categories:

$5,000 MOVES YOU IN
3 BR, 2 BA home, Rent-to-Own, $2,000 Total Monthly Rent
$500 per month Rent Credit Toward Purchase Price
Open Sunday 1-3 PM, Bring Your Checkbook; Won't Last!
777 Easy Street, Pleasant Heights

Of course, the numbers should be adjusted, depending on the market value of the home and its monthly rent. My experience has been, as a seller, lease-option renters are willing to pay at least 10 percent above fair market rent in return for the rent credit and locking in the option purchase price at today's market value. As a seller, I prefer a one-year lease-option, but I have been known to agree to a two-year term.

LEASE-OPTION PROS AND CONS FOR SELLERS. If your home hasn't sold "the regular way," consider the lease-option "rent to own" advantages for sellers: (a) continued income-tax-deduction benefits, including depreciation, until the option is exercised; (b) upfront cash from the buyer, which is the first month's rent plus the nonrefundable option money; (c) monthly rent cash flow instead of having a vacant house or condominium; (d) there are usually more lease-option buyers than sellers; (e) above-market rent; (f) lease-option tenants usually treat the property very well; and (g) lease-option buyers will agree to a top-dollar option purchase price. The only significant seller disadvantage is the lack of an immediate cash sale.

LEASE-OPTION PROS AND CONS FOR BUYERS. Among the many lease-option benefits for buyers are (a) low upfront cash requirement as compared to buying; (b) it's usually cheaper to rent than own; (c) the rent credit toward the down payment is like a "forced savings account"; (d) if the home goes up in market value, the buyer benefits from the locked-in option purchase price; and (e) buyers can try out the home before buying.

Possible disadvantages for buyers include no itemized income-tax deductions (this is more than offset by the rent credit) and uncertainty knowing if you will be able to afford to buy before the purchase option expires.

HOW DOES THE REALTY AGENT GET PAID? When a house is listed for sale but it hasn't sold, some listing agents are reluctant to recommend a lease-option because they won't immediately receive a full sales commission.

But I often suggest to agents, "Isn't it better to take part of the commission now and part of the commission when the option is exercised, rather than earn no sales commission at all?"

HOW TO FIND HOUSES AND CONDOS TO LEASE-OPTION. Because there is usually a shortage of lease-options, buyers need to get creative. One strategy is to read the "houses for rent" and "houses for sale" classified newspaper ads for clues. Often a landlord can be converted to a lease-option seller by dangling some nonrefundable option money (after you decide you want to "rent to own" the house or condo).

Another strategy is to run your own "House for Rent Wanted" or "House Wanted" classified ad. I learned this technique from a real estate investor who advertises "Executive needs 3 BR, 2 BA house on five-year rent to own. $5,000 option money. Call Jimmy (555) 555-5555." He doesn't get many phone calls, but one or two from motivated home sellers, landlords and real estate agents will be enough.


www.LagretRealEstate.com