Rent to Own

[legion]

I got a kind of an offer on the house today, well, more of an inquiry.

A lady called and asked if I would consider a rent-to-own type agreement.

I told her that the idea hadn't occurred to me, and I would have to think about it. I told her I would call her back early next week with a decision.

I have some thoughts on this kind of agreement, but I'll keep them to myself so as not to spoil the discussion.

Has anyone here ever done such an agreement as a buyer or seller? If so, what is your experience? Are there standard terms for such agreements?

[sailchef]

She must have ordered Carlton Sheets tapes & videos. No Money Down.

[Groesbeck Hurricane]

No money down. Purchase contract. Starts taking out stuff from home. Builds another home. Uses interior and exterior features from your home. Leaves. Forces you to foreclose on her. She has a filled her new home with features from your old home at a fraction of purchasing new. At least, this is the experience of a close friend of ours with a "rock solid, attorney written" contract. Your experience may vary.

[Hard-Deck]

Don't do it!

I did this once and the people paid for a year, then defaulted and left. If they were worth a salt, they'd be able to get a mortgage and buy it from you.

[Zeke]

Newspaper syndicated columnist Robert Bruss championed the idea of rent applied to down payment for the purpose of real estate purchase. He died somewhat unexpectedly in 2007.

He did write a book and you might find one in your library. The title was "The Smart Investor's Guide to Real Estate" (1981)

Here is an article by him about what he termed a "lease option (to buy)." If the property goes up in value while you have the option, you can make some money at this. But, when properties are going up in value rapidly, you won't find many options. this may be a good time to do this, depending on whether you're the buyer or seller.

[Porsche-O-Phile]

I'm doing it right now. No problems thus far. I'm likely to exercise the purchase option unless things nose-dive again in which case it gives me a good "out". The owner is getting a good deal - we have a vested interest in caring for the property even if we decide to not buy down the road. Seems a smart way to keep loser tenants who might just trash the place away.

I'd think this would be a particularly good time to offer things like this - there are a lot of people out there who are either recovering from big losses and therefore don't have a down payment or are leery of the current 'recovery' to take the plunge - in other words they want to see if it's real or not before committing.

Also from either perspective (buyer or seller) you get to lock in your price early. The owner of this place is betting on prices going down by the time our option-exercise date is; I'm betting it will be flat or slightly up (it's in 2012). If he's right, he locked in a price and made a little extra money. If I'm right, I'm happy. Hell, even if things are down a little I still think I got a good price unless things drop another 20-30% and stay there (doubtful for this market, maybe a 5-10% drop at most is what I see).

Anyway, don't dismiss it - it can be a useful tool for both buyers and sellers.

My in-laws bought their first house years ago that way too. I think it can be a very smart way to do things if you're careful.

[MT930]

Just Say No

If you need the equity to move to replacement property, your stalled. If you must I would take a detailed look at the credit history of Tenant/ Buyer. They are rarely worth the risk.

If you must, make sure you have a short fuse on the option. Lowering your asking price will go farther to facilitating a quicker sale to an able Buyer.

Originally Posted by legion

I got a kind of an offer on the house today, well, more of an inquiry.

A lady called and asked if I would consider a rent-to-own type agreement.

I told her that the idea hadn't occurred to me, and I would have to think about it. I told her I would call her back early next week with a decision.

I have some thoughts on this kind of agreement, but I'll keep them to myself so as not to spoil the discussion.

Has anyone here ever done such an agreement as a buyer or seller? If so, what is your experience? Are there standard terms for such agreements?

I'd be very careful. As others have noted, many things can go wrong. Overall, I think it's a way better, less risky deal for the renter than the seller.

[Zeke]

POP, glad to see you taking advantage of strategy. I know LB was a big bust for you. Getting down a root or two doesn't hurt.

[jyl]

If no bank will give her a mortgage, why do you want to?

[on2wheels52]

oops, thread not going the way I expected. Thought it might refer to furniture/appliances, which my typical customer is familar. In my defense, they advertize.
Jim

[legion]

I'll let this thread marinade for another day before I jump in with my thoughts/ideas.

[john70t]

Add up all the numbers, and figure out what the total cost to purchase the property will be. Beware the clauses.

Then:
-guestimate deductable interest vsotential earnings,
-guestimate what the cost-of-living index(i.e. inflation to pay off foreign debt) will be 30 years from now,
-guestimate the local political atmosphere(i.e. future buyer draw),
-then get back to us.

[911Rob]

Leg, I wouldn't do it fwiw.

I sell for a Rent-to-Own company from the coast and I can give you some info on it, but you'll tie up your equity in your current home and then not be able to purchase another? (from what I've read about your situation?)

These companies take $5K to $10K down, non-refundable. Then they do a 2 year contract where part of the rent goes towards the down payment if they complete in 2 years; if not, all deposits and rents are non-refundable. They also build in the purchase price of the home; current price plus x% per year makes the purchase price. That way the title holder gets an ROI built in. I have some contracts I can email you, but as I said, I wouldn't. It's a rich mans game.

Cheers and good luck FSBOing your home; lol

[Eric Coffey]

Yep, I'm with Rob on this one. The only way I'd even remotely consider it (as a seller) would be with a very large chunck (10%-20%) of non-refundable earnest money. There are a lot of strategic defaults going on, so there are people out there who can conceivably be in the position to put that kind of money down, and have good income. They just have trashed credit from the default. If you don't have that much equity in the house you are selling to begin with, and can secure a nice chuck of money up front, it could be a win-win for both parties. Still, seller-beware!

[Tidybuoy]

I believe the benefit of a "rent to own" arrangement is that most people who do the (the renters) don't have the income or credit or down payment to purchas a house now.

If you are willing to rent your house, consider it a rental. But, with the RTO arrangement, you should charge a higher than normal rent (1 part covers the normal rental of your house, and the 2nd part is applied to a future down payment.

I beleive that if you check statistics, you will find that a large percentage of people never follow thru with the purchase - the benefit to you is that you collected higher than normal rent for your rental property.

[Porsche-O-Phile]

The most important factor for us was down payment (the money we'd saved for one got wiped out paying bills/rent/etc. after being laid off) and uncertainty about the short-to-intermediate "recovery" and associated job stability. To be honest I probably COULD HAVE sold off enough stuff and scraped together another down payment, but I figured it just wasn't worth it given the uncertainty that's still out there and will likely be there for quite a while to come. So I didn't. My primary factor (as it is for a lot of others I'm sure) is that there's still not enough certainty that this so-called "recovery" is really going to hold. Even the taxpayer housing credit wasn't enough to entice me. I'm not about to lose (potentially) tens of thousands or hundreds of thousands of dollars, my reputation and my creditworthiness for a lousy $8k (which has to eventually be paid back anyway).

As with most things, purchase options have their place for the proper individual/circumstance. They should not be dismissed outright, especially if you're underwater on a property and looking to get something for it rather than having it sit in a stagnant market in perpetuity.

Consider also that the banks are sitting on literally MILLIONS of foreclosed properties right now. They're deliberately holding a lot of them off the market to keep prices artificially high in the hope of offsetting the short-term carrying costs (taxes, maintenance, someone to drive by and check on them a couple times a week) through letting them trickle back on. However, foreclosures have NOT peaked - they're still rolling right on in and defaults in commercial RE are starting to climb. There is likely to be a "panic sell" of a lot of these properties in the coming months, which may well push prices down in a lot of markets and which will certainly make it tougher for a private party to sell (you have to compete against that many more REOs).

Your market might be different, but I also think - in general - that this situation still has a way to go before hitting a real "bottom" and the foreclosure numbers/inventories start really dropping.

Given that, purchase-option made a hell of a lot of sense for me.

[Porsche-O-Phile]

I need to correct some incorrect ASSumptions people are making above:

First off, a purchase option is not the same thing as an OWC (owner-will-carry) arrangement. In a purchase option arrangement (what we're doing), you buy the purchase option for some agreed-upon price (usually a couple of thousand bucks). You then "rent" the place for a period of time (24 months, 36 months, whatever) and your "rent" payments to the owner become your down payment IF you decide to exercise the purchase option when the date arrives. If you do NOT exercise the purchase option, the seller keeps the property, keeps your payments as rent, and keeps the money that the purchase option cost. There are clear advantages to both buyers and sellers in particular circumstances here.

In an OWC, the owner acts as the bank. They do not require you to get a mortgage and essentially you make the payments directly to them. This is riskier for the owner since a buyer who defaults can be difficult to evict/foreclose on.

In my case, I'm still responsible for getting my own mortgage at the end of this if we decide to exercise the purchase option, but I'm not terribly worried about that seeing as the down payment is a non-issue at that point (seller pays it out of the money I've been paying him) and my credit is still very good and only getting better.

As I said above - there's a lot of misinformation about these arrangements and you're foolish to simply dismiss them out of kind. There aren't a lot of good, qualified buyers out there right now and the few that are can almost always find better deals from a bank's REO/foreclosure stock than you'll be willing to stomach.

Might be worth talking to someone about.

[Eric Coffey]

Originally Posted by Porsche-O-Phile

I need to correct some incorrect ASSumptions people are making above:

Indeed. You are in a lease-option situation NOT a lease-purchase (rent-to-own). Neither one has anything to do directly with OWC. In other words, you are simply renting a property with the option to buy at the end of the lease term. Also, I'd be highly suspect if someone is telling you that they are going to give you all of your rent back as a down payment. I can see sellers giving (partial) rent credit towards closing costs/pre-paids, but in most cases there are restrictions on what monies the seller can contribute towards the buyer's actual down payment. So, unless they have set up a separate escrow account that your rent gets deposited in every month, I would be very skeptical.

Anyway, in a true lease-to-own situation (lease-purchase), there are two contracts in place. A rental agreement, and a purchase agreement. The purchase agreement ignites at the end of the lease term. Usually there is an earnest money deposit (for the purchase contract), and is often taken in lieu of a rental security deposit. The only difference is that I would make the earnest money non-refundable (as opposed to a rental security deposit, which is refundable).

As a seller, I would personally never even consider a lease-option if I was ultimately looking to actually, you know, sell. With a lease-option, you have no recourse and very little compensation for time lost, and potential property rehab (carpet, paint, etc.) if they don't follow through on the purchase. The only thing I might consider would be a true lease-purchase, but only with a sizeable non-refundable EMD. That way the tenant/buyer has a vested interest in following through with the purchase. Also, since there is a high percentage of lease-purchase fall-through, it would weed out the contenders from the pretenders.

Otherwise, I'd take a pass and wait for a conventional/FHA/VA buyer to come along. Contrary to what PoP thinks, there are plenty of qualified buyers out there, especially under Jumbo and FHA limits. You just have to make sure that you are priced right, marketed right, and that the home shows well. Either way, good luck!

[fintstone]

As the landlord, lease with an option to buy should be designed so that no money is collected toward anything but rent (no down payment component). Also, the rent should be significantly higher as you take all the risk and the tenant takes none (risk adversion/acceptance has a monetary value) you have the risk of a large increase in home prices as you would have already set a purchase price based on the value when rented...as well as the risk of the property value decreasing. There is also legal risk as well as the time value (opportunity cost) of the money (you could have invested the properties sales price elsewhere) and inflation to consider.