Ah, what a day when you look at Craigslist.
In my over 26 year career in real estate, sometimes I get asked about homes that are advertised as "Rent to Own". I usually "cringe"... I don't know how receptively they're looked upon in YOUR market area; in my area I don't think they are a great option.
As a matter of fact, they're most likely just plain awful, Why would someone want to do "rent to own"? What type of buyers and sellers do you attract with "rent to own"?
Desperate, mostly...
Let's talk the truth here. For a seller to open themselves up to all the potential headaches of "rent to own", they probably can't sell their house, but HAVE TO MOVE. They HAVE to move. Either they won't lower the price, can't lower the price, or won't qualify or consider a short sale. So they pick off the "last resort". They venture in the world of "rent to own".,.
For buyers, in THIS market? They'd had to most likely be slightly delusional. Unless they get the property for a steal, and I mean A STEAL, why would they do this? In a declining market, it almost won't happen anyway. It may not appraise for the agreed upon price, unless there is a clause written to address this.
So, before I continue, let me review the "rent to own" scenario, The seller has a home and they advertise it as "rent to own. They usually mean, the buyer is a tenant and is entering the transaction AS A TENANT. THey sign a lease for a year or more, and the landlord MAY agree to put aside a certain percentage of the rent towards the purchase price, usually the downpayment. If the buyer doesn't go through at the end of the lease or at the agreed time, they generally LOSE that money and the seller - owner keeps it as part of the rent. Unless the buyer MUST have that property and doesn't have a deposit for financing, rent to own usually attracts buyers who can't buy... maybe for a long long time. They hope their credit gets better. Maybe yes, maybe no.
What types of sellers go for this? Either the ones that are doing the buyer a favor, like parents, friends, etc... OR... sellers who are so desperate they decide THIS is their ticket. But if it's overpriced to begin with, it may, and I EMPHASIZE "MAY", it may take years for the overpriced figure to catch up with the market. With more and more people doing short sales, some of them ask me, brusied credit and all, "Jim, let's look for rent to own"? And now, the landlords of these homes, found far and few, won't rent to tenants like these, unless THEY are ridiclously overpriced, and will pretty much take any live body the minute they walk in the front door. Problem is, some of these "buyers" got burned before. Even if they don't qualify now they won't go near anything that they consider overpriced.
And the cycle never ends...
What are YOUR thoughts?
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In my experience, rent to own opportunities have always turned out to be either complete scams or complete failures. I have seen dozens but never one that has ended in a home purchase.
Jim.. I would agree with some of what you have said, but some things are missing. Keep in mind that some sellers might do this if their house is vacant and that the home has been on the market for 6+ months already. Not everyone can afford that either.. so yes, you have to weigh the pros and cons.. and the risks involved. Let's look at this from all angles. Also, what about a buyer that has a leasde coming up, needs more room because of a new baby and such... found a house that they absolutely love... shouldn't one be buying a home that they love and not just like? And maybe they are on;y 2 to 6 months away from buying.. Well, it could be a smart move. I understand what you are saying, but there are many reasons why people might rent to own... good or bad.. both seller and or buyer. Just food for thought.. thanks
Jim,
These can be difficult and clients in this condition are hard to work with. Good Post.
I've only seen one work out as planned. I advise my clients to avoid them if at all possible.
Hi Jim - What a nice area you must live in! In the land of negative equity and up to 18% unemployment levels - it's at least 10 percent of the market in parts of SE Michigan. Renter has a bigger investment (whether it be psychological or actual) in the property and property owner who doesn't have $ to bring to the closing table or the investor who wants a more committed buyer - it could be a win/win.
I see it as a sort of pre-engagement to the engagement period of homeownership or serious dating without a ring.
Love Boston and any of Mass I have seen! Pretty people with evidence of the great American Melting Pot with lots of European flavor!
While I agree that 'rent to own,' or 'lease option,' gives the buyer zero advantage, I think you are overlooking the the reality of the market. There are thousands of people who have lost a home to short sale, foreclosure, or job loss and don't qualify for a mortgage. Rent to own is not a good option, but contract for deed has made a comeback and gives a buyer ownership.
Recent reports indicate that 32% of homes in the US are free and clear of a mortgage. There are also many investment sellers who have a home on the market that isn't moving, and a contract for deed is an alternative that still gives them income and allows them to move on with their life. To say that the buyers are delusional or desperate misses the point. If you lost your home, and had two children, it would be very hard to find an affordable apartment that is kid friendly, much less with pets.
There are always scammers, but for every foreclosed or short sale home, there is a family who needs a place to live. If Bank of America says that they are closing 10,000 short sales per month, where do you think all of those families are going? 75% of the people who lose their home do so because there was no professional intervention to help explain their rights and options.
Before we become too opinionated about 'delusional and desperate,' think about what those families are up against in this market. What are their alternatives? Who is there to help or advise them?
Some of the best buyers and sellers I have had as clients are lease purchase contracts and they have all worked out and closed for me. Perhaps it is because Atlanta is such an entreprenral city, many business owners have a problem qualifying for financing and lease purchase has given them the opportunity to get a home while they were starting their new business. They have good credit, have savings, just can't qualify because of the newness of their job. Many people are in this situation right now with layoffs. Lease Purchases have been great for us and we have worked with great sellers and buyers. Not sure why you are saying What kind of Buyer or Seller would do this? My response would be great buyers and sellers do it all the time.
I don't cringe, I roll up my sleeves and help these people. This is a much better solution than short sales or just straight rentals, at least the tenant has some skin in the game!!!
I've seen a few fall apart because once the renter has been in the house they discover reasons why they shouldn't buy or end up finding another property that they want to call home.
Jim, I have seen them work in very special situations and there are a myriad of reasons to consider a Lease With Option.
Margaret
Actually I have been involved in any "rent to own" situations thank goodness..
A Seller who needs "a payment to cover the payment" can use "Rent to Own" to attract Renters. A house may not sell in this stale economy, but there are many, many Renters out there, as referenced by Mary Jo above. The Seller with a vacant unsold property can at least get the money to cover the mortgage.
Depending on the State, the Parties may need both a Contract for Sale and Purchase (possibly with Option), plus a Separate Rental Agreement or Lease Agreement. Is there a separate Deposit for the Contract to Purchase, and a separate Damage Deposit for the Rental? Check with your State's laws, and seek legal counsel if necessary.
My experiences / observations of many Rent to Own cases are these:
Some Renters / Buyers errantly believe that the monthly payment is being piled up for them toward a Down Payment. For example, they think that if they pay $1000 per month rent, then at the end of a year they will have $12,000 for a down payment. Very rarely is this the case. It is explained at signing, but a year later they really think the money is there for them.
Renter/Buyer also needs to understand that this is contingent upon them getting a loan at the end of the rental period. It does not guarantee them that they will get the house. If they do not qualify for the Loan, the option may be shot, and they may be put out.
If there was a Deposit made at signing, where is it, and is there a contract contingency that allows them to get it back in the event they cannot close, or is the deposit forfeited to the Seller?
My final observation is that the majority of times, it does not work out, there is no Transfer of Title or Closing, and the Renter/Buyer moves on.
Exercise caution when putting these deals together. Structure documents carefully, seek counsel and advise the parties to get legal counsel prior to signing.
Rent to Own can be a great "Draw" for a Seller who desperately needs income to make the mortgage payment. If the Deal falls through, the Buyer is out the rent they would have paid to an apartment or rental house anyway, so no harm, no foul.
The rent to own buyer here typically has a credit score south of awful. But next year they think it will be better. Guess how often this works out??
My thoughts are you may want to consider researching your topic a bit before deciding anything about it, as it's clear that you have very little understanding of what a lease option can do for both buyer and seller. Glad to see by the comments that there are at least a few agents out there able to think outside the box a bit. They are the ones that are going to make a mint in the coming years in real estate, since they are able to do more than "buy this now or go away."
There are instances in which rent-to-own is appropriate. The problem that the concept of rent-to-own is being peddled by snake oil sales people as a panacea for every credit challenged would be buyer who cannot qualify for a mortgage, every credit challenged renter who cannot qualify for a normal lease and every owner who cannot sell their over-price or underwater house in today's market.
Welll, I never said rent to own should never be done... in SOME cases it probably IS appropriate, however, let me "make up" a case in point to illustrate what I'm trying to say... The following is based on a true story that did not happen to me.. The dollar amounts are fiction.
We have Mr. Seller who owes $570,000 to the bank. After over a year of the property being on the market, Mr.Seller decides to do a rent to own. The agent rents to a nice family; they do a two year lease. Meanwhile the market's gotten even lower than two years ago. The Realistic price of the property drops around $50,000 from a realistic $550,000 to $500,000. The seller still can't sell; the buyers still haven't been able to fix their credit, and the property now has more wear and tear. Rents also dropped and the seller now winds up losing over 600 a month in out of pocket expenses. The buyers move out and the seller now is in even worst shape than before. The seller should have sold at a loss THEN; now he's REALLY in trouble, I'm sure there are a lot of scenarios that are beneficial and I'm NOT knocking them.. I hope this is a discussion, not a debate. I just think that statistically speaking, most, NOT ALL, but MOST "rent to own" scenarios wind up doing more harm than good.. I didn't say ALL...
I belive that rent to won and lease options will be the only way many people hurt in this economy will be able to get back into the housing market.
I also know an investor who does rent to owns. Very few actually follow through on the contract. He always comes out smelling like a rose!
I think that rent to own is back again (just like seller carry back); it is a sign of the times.
Jim: I had a client lead drop me when I suggested to them that a "rent to own" home is loaded with pitfalls.
I have a seller asking about this right now and I appreciate everyones expereience. I really haven't done any and your combined thoughts will give them "food for thought".
I think 'rent to own' or 'lease to purchase' are great options for buyer clients who cannot qualify at present and need some time to get finances worked out. I'm in Atlanta, and we have some good experiences with these transactions. I'm working with a couple now that started a year ago in a lease to purchase deal. Throughout the year they have gotten to know the neighborhood and have realized that the HOA is way too inflexible. Had they purchased and found out afterwards, they would have regretted the decision.
Working with clients who need to do a lease with option to purchase or 'rent to own' is a good service for agents/brokers to provide. Thanks for the post.
When I drive through neighborhoods that I familiar with, I cringe when I see "For Lease" signs that used to be "For Sale" signs. Unfortunately, most have been on the market for about 1 year, so sellers get desperate.
I've done several Lease with Option but that is very diffferent than most of the Rent to Own inquiries I receive. I have found that most buyers don't understand the concept. They think rent to own means the seller is acting as a bank and each payment reduces the final price of the home. They are always surprised to find out the rent is above market and they lose everything if they can't complete the sale in a year or so. With every Lease Option I've done there was upfront money in addition to the rent. Most prospects don't move forward when they understand all that is involved.
I never really understood why anyone would want to do it when you get down to the facts. At least here anyway, maybe 15 years ago some by owners would charge a non refundable huge fee if the buyer defaulted. Great deal for the seller. However, I have explained to renters that if the seller decides to sell at some point they will have first crack at it before it goes on the market.
Jim, you pick one example of a bad rent to own scenerio and conclude that most don't work? Let me ask you, do you assume that most sales will never happen since a few don't make it to closing? What's the difference?
Using your example: An agent (I'll assume a buyer's agent) rents the home. Did this agent run comps? Explain the lease/option transaction? Inform the buyer that prices are currently dropping? Did the seller's agent do anything similar for the seller?
Was the buyer's credit run upfront to determine where they are now and where their credit needs to be? Did the buyer's agent put them in contact with a credit counselor/lender that could help them repair their credit? Did either agent and/or the seller keep track of the buyer's progress in the deal?
Did the buyer's agent find out what shape the seller was in before recommending a lease/option to their client? In other words, did they research to determine if the seller could close?
If none or only some of the above wasn't done (and more questions need answers as well) whose really at fault in the deal?
it is creative financing, I know a numbe rof homeowners that currently own BECAUSE of rent to own, and, I know someone locally that has a MONSTER business doing rent to own and contract for deed properties.....to each his own....
Roger, no need to get defensive. Let me ask you, what type of seller or buyer would get into "rent to own"? Why would a buyer want to rent a property under this situation? The comps are useless; the market changes. What may be $500,000 now may be $450,000 in a year? Maybe not. No real estate agent say say with 100% certainty what the market will be like next year.
Credit? I had a buyer once told by the mortgage officer to wait 6 months and not do anything stupid. The guy runs over to BestBuy and spends $6,000 on a TV system and whatnot and then, get this, defaults! He wasn't in a rent to own. LOL
Yes, Roger, I think the agent was at fault, by the way, more than anyone. BUT.. I've seen this.. I also see a lot of "wiseguy" sellers and buyers out there too..
I never said all, by the way... I am saying 'Some" or even "Most"... For the ones that call it creative financing, yes, if done honestly, it can be a wonderful way to buy a property. I think the problem is there are so many dumb ones out there the few good ones are either gone fast or not recognized.
I love rent to own leads. . they are future (eggs) buyers that need some warm and nurturing before they hatch. .
Good loan officers make great hen mothers. .
Fascinating subject and question raised....My thoughts are that it attracts the mentality of a an owner which makes for a better renter. In addition, it is also a nice carrot to offer the renter to pay the rent on time, take care of the property under the guise of...and one day, it could be yours. Even if you don't buy it, You get a AAA recommendation when you leave. In addition, it may allow the owner/landlord to charge a little more rent and the renter happy to comply for the option. Lastly, what renter wouldn't mind having this option to either accept or reject...assuming it is set-up properly. Thank you Jim...
I am getting more & more calls from BUYERS who want rent to own. Translates: I have no money to put down and bad credit.
I don't agree with them. You just never know if the seller is more interested in the down payment than the long term relationship of selling the home to the tenant. They keep the money and don't send the payments to the bank then it gets foreclosed on and the tenant is wondering what happened?
Lease options can be done, but it takes just the right circumstances to be successful.
For sellers with a lot of equity and an empty house, it may be an attractive option, especially if the property had previously been a rental, or second home.
The buyers' reasons for needing to do it are also important. When the credit and income are good, and the reason to lease-option is to establish more time on a new job, or save more for down payment, it has a higher chance of success.
In a declining market the seller is taking a big risk because if the values decline below the negotiated purchase price, the buyer usually won't or can't buy it!
They don't make too much sense to me either, I agree with you Roger.
Sorry, Jim. Didn't mean to sound like I was getting defensive. Just trying to make a point. Sometimes, it's hard to put a tone on the written word :)
As to your question(s) of what kind of buyers and sellers would do this, well, I guess I see a few blog posts in my future :)
I don't disagree that there have been some bad rent2own-lease/option deals. There have been bad purchase deals, too. In almost all cases, it comes down to lack of communication. As to the guy blowing it by buying up a bunch of stuff, then defaulting...it happens with 'normal' buyers as well.
Roger, when you write your posts, I'll be on the lookout for them! I really want to see what you'll be saying.
I guess my line of thinking is; if you have a motivated and able seller, there is NO need for this stuff. Same for a buyer...
I can understand situations with people moving but I can't always agree that someone would rent instead of buy.. unless it was job related or similar.
Thanks
Jim
I know of one situation where the owner has sold the same house approximately five different times in lease-option contracts...very lucrative for her, as she keeps the option fee each time the would-be buyer can't perform. What she has is really a rental with the rent income jacked up by higher than market rent payments (extra to be applied to downpayment, which never happens). Sorry, I think screwing people as a business model is not in my comfort zone.
For those of you doing these regularly, how do you structure the contract so that, if the buyer can't buy at the end of the term for the sole reason that the value isn't there to justify the sales price and they can't get a loan, what happens to the option fee? Doesn't seem fair for the buyer to forfeit the money when they can't buy through no fault of their own...ought to be addressed up front in the option contract.
I get a lot of buyer inquiry calls asking if banks do rent to own. Most rent to own buyers don't realize they need a downpayment on top of the rent.
Jim. I love your position. Really. It leaves the field more open to Realtors and investors who understand the benefits of lease-options to buyers and sellers. And, frankly, I'm surprised at the large number of responses you've received that don't fully agree with your position.
I recognize that you say that some might be beneficial, but most aren't. And I agree that lease-options aren't appropriate in all circumstances. But they're appropriate in quite a few different scenarios. And that includes both rising markets and declining markets.
Just one tiny example: You state
For buyers, in THIS market? They'd had to most likely be slightly delusional. Unless they get the property for a steal, and I mean A STEAL, why would they do this? In a declining market, it almost won't happen anyway. It may not appraise for the agreed upon price, unless there is a clause written to address this.
Why delusional? Consider the possibilities:
First, property values can continue to decline. To keep this short, I won't go through all the numbers, but an option allows a tenant-buyer an easy out with far less cost than purchasing. A few numbers, though: You buy a home for $300,000. You put 3.5% down (assume FHA). The buyer has $10,500 in equity (the down payment). Home prices decline 10%. The home's now worth $270,000. The buyer is upside down by about $20,000. (And that's not counting any costs to sell the property, if the buyer needs to sell.) Alternatively, the tenant-buyer does a lease-option. Oh, and they can be done for virtually no up-front money. I've done it. But assume the buyer pays a 2% option fee. That's $6,000. The home declines by 10%. Worst case scenario: At the end of the lease the tenant-buyer departs, losing his $6,000 option fee. That's a heck of a lot better than losing $30,000 in value and being upside down by $20,000.
Or the property can rise in value. That's happening, even today, in some areas. Everything in a lease-option is negotiable, but let's assume it's a 3-year lease-option with a purchase price of $315,000. In 3 years, the value goes up 10%--that's only 3% a year. Now the house is worth $330,000, so the tenant-buyer can exercise his option and have an immediate $15,000 in equity.
Those examples oversimplify it, of course. It doesn't take into consideration rent credits, for instance, or whether the buyer may be paying slightly more than market rent. But the basic scenarios still hold. And the point is that lease-options can be beneficial to the buyer in any market.
I already sent this post to an attorney friend of mine. If he thinks this whole thing is viable and ethical, I will try it myself. I sincerely want to help people and if this is really a way to help people now, there's nothing wrong with it.. However, I want things done right. Taking high amounts of money from people because they want to be called "rent to own" folks rather than just plain old tenants just doesn't seem right. Thank you Mr. Tepper, your post may actually have created another rent to own real estate agent!
LOL,
Jim
Oh, by the way.. I forgot to mention I was just checking MLS in my area. There is an agent well known as a "rent to own" guy. Pretty much what I see is what I won't do myself. This person seems to have some ridiculously overpriced listings. You'd have to be a "pie in the sky" buyer with extra cash to throw away for no reason to ... LOL
I can understand rent to own but that doesn't give someone an excuse to ridiculously take ridiculously overpriced listings ...
Zero rent-to-own's in my experiences have closed with a renter buying the property. With that in mind, I have generally steered away from them. In our current market, there are very few buyers for the high levels of inventory on the market. Most of these listings are not overpriced, just not attracting the buyers out of the apartments. We have experienced in this market that buyers are in general leery of the job market and are not feeling so stable in their jobs right now. So to that end, the sellers who must be moving on for one reason or another, I am encouraging to consider lease(rent) to own. The lease to own people may take better care of the property if they think they are buying it. There is some profit potential to the seller of the home when the renter buyers do not end up buying and can pocket some extra option money (or whatever it is termed) when the renter buyers fail on their end.
I am skeptical and let my buyers and renter know to take a good long look at the details. I often see it as a way for the owner to get a chunk of cash out of the renter knowing full well the renter will never own the property.
Why do I love rent to own so much? Because, it is a win-win for both buyer and seller. Here, we will focus on the seller because the benefits for the buyer are quick and obvious. They don’t need a huge down payment or very good credit and they have the option to buy the home later on when they might be in a better financial situation.
If you are interested more about rent to own transactions, I have here an article from a <a href="http://www.mahopachomesny.com/rent-to-own/">mahopac real estate</a> broker.