NO Money? NO Credit? . . . .NO Problem!
Rent to Own . . . .
Lease Purchase . . . .
Owner Finance . . . .
First of all, if the first line sounds a bit dumb, that’s the point. If you have no money and no credit, do you really think you’ll have no problem buying a home? If anything, you are just asking to be taken advantage of by a savvy landlord. . . And that’s when you really do need a Realtor© on your side.
Here’s how a Rent to Own or Lease Purchase is supposed to work…. and what it is NOT
Let’s say a landlord agrees to lease his property at $1500/month, with the promise that if you buy the house any time within a specified period (maybe three years), he’ll apply the equivalent of $200/month to your closing costs. That could be as much as a $7,200 rebate coming from your landlord three years from now. Sounds great, huh? Kind of like a forced savings plan to cover future home buying costs . . .
However, what it is NOT, is – it is not a Home Purchase Agreement. In fact, the typical Rent to Own or Lease Purchase seldom includes the actual price and terms of a purchase, but it always includes a conditional clause that you be able to obtain your own independent mortgage at some point. So if you are entering into a Rent to Own or Lease Purchase because you have really poor credit, or you work for cash and have no reportable (documented) income, your chance of getting a mortgage loan in the next year or so is pretty slim.
Note: The seller of a property cannot contribute down payment money to a buyer – whether from a lease purchase contract or otherwise. It is just not allowed. Not with FHA. Not with a conventional loan. Therefore any funds rebated by the landlord from the Rent to Own, Lease Purchase agreement must be used to decrease the purchase price or for prepaid expenses and closing costs only.
What about Owner Finance. Is it different from a Rent to Own or Lease Purchase?
In a word, YES. A true Owner Finance is where the homeowner becomes your lender. As such, he would no doubt want to see your credit report, employment history, and treat the entire transaction much the same as a mortgage lender – the main difference being that he may not be as strict on certain qualifications as a traditional lender. However, the downside is that the homeowner may not be willing to carry the financing for a 15 or 30 year term. He may ask for a ‘balloon’ payment at the end of three or five years. . . which means by that time the buyer should expect to be in a position to obtain outside financing to meet the balloon payout, or risk forfeiting on the contract.
In the event a homeowner already has an existing mortgage on the house, you as the buyer should insist on doing a Bond for Deed with a third party escrow agent handling the finances. It’s still an Owner Finance, but with Bond for Deed, there will be a formal contract filed with the Clerk of Court and there should be an independent escrow agent handling the monthly payments…. both yours and the sellers. This will provide you assurance that as you make your house payments each month, the seller’s mortgage is also being paid to his mortgage lender by the escrow agent… Prevents the risk of fraud or foreclosure.
Are there other advantages to a Rent to Own or Lease Pruchase?
Well, if you are truly unable to put money into a savings account each month (with interest), maybe this type of forced savings is the best thing for you. In our example above, you’d have $2,400 accumulated the first year, $7200 in three years. But note – these amounts apply only to the purchase of this one house.
Now, for the landlord, Rent to Own or Lease Purchase is a terrific deal. If the tenant changes his mind and moves out, all payments will have been fully earned as rent. No refunds. Or if the tenant is never able to repair his credit, or for other reasons can’t qualify for an independent mortgage, the landlord will never be obligated to return any portion of the lease payments. The terms of a Lease Purchase are very specific. . . The landlord is not selling you his house.
Another advantage to the Rent to Own or Lease Purchase for the landlord, is that he can usually charge a higher monthly rate for the house than the market might otherwise dictate. Is he going to tell you that? Of course not! But if you are working with a competent Realtor, he should be able to tell you if the lease rate is the true market price, or ‘jacked up’ just to get extra money out of you.
Any Disadvantages of doing a Rent to Own or Lease Purchase?
Well, yeah!! The obvious disadvantage is that you usually end up overpaying on your rent. And for what? The hope of buying the house some day?
Another point I’d like to make here is that if a tenant has accumulated a $7,200 credit by the end of three years, and he only needs $5,000 to cover his closing costs, he can ask the home seller to take $2,200 off the purchase price. My answer to that is, BIG DEAL. I could get you $2,200 off just about any home any where! Shoot – I can probably even negotiate a purchase agreement where the seller pays part or all of your closing costs. And that’s without having to overpay on rent for two or three years!
But the most obvious disadvantage is the price of the home. If the price of the house IS set at the time of the lease agreement, and the expected sale date is a long time off, how are you to know that price will be the true fair market value a year or two from now? Or in three or four years? And if a future price is NOT set at the time of the lease, then you’ll still end up having to negotiate price and terms just as on any home purchase. Bottom line: Why bother with a Lease Purchase in the first place? Just get the best rent price and terms you can get.
So what should you do if you really want a certain home and you just can’t swing it right now?
That’s easy. Let me help you negotiate an ordinary fair-market lease with an Option to Purchase clause inserted. This gives you the option to enter into a Purchase Agreement on the home prior to the expiration of the lease, thus keeping the home off the market and preventing someone else buying it out from under you.
For example, I had a well-qualified buyer who was awaiting a property settlement from a divorce. She saw a home that had absolutely everything she wanted…. Backed up to a golf course, swimming pool, etc. She had stable income and excellent credit, but she wouldn’t have enough for her down payment and closing costs for several months.
So we entered into a Lease with an Option to Purchase. Sure enough, the issues with the divorce were settled in plenty of time for her to exercise her option, negotiate a purchase contract, and the sale moved forward.
So what do I recommend?
Stay away from any and all Rent to Own or Lease Purchase deals. You will almost certainly end up paying a higher rent and in the long run, you probably won’t get a good deal on the home.
Call me. If you really like the home, let me help you negotiate a lease at fair market value with an Option to Purchase clause. Or I can help you negotiate and structure a true Owner Finance or Bond for Deed. But no matter the structure, real estate transactions involve a lot of money (often your life savings), so don’t try to go it alone. Get the help and expertise of a professional.