I had someone contact me about the difference in renting and owning a home the other day. This was not the first time and I am sure it will not be the last time I get asked about this subject. What it all boiled down to was the person did not have a great credit score, little money, debt to income over 65%, and had not been working as a small business but for 6 months.
So once you start talking to people about the cost of ownership, equity, taxes, insurance, etc. folks kind of have their eyes glaze over and you look for a dribble cup as you have probably put them to sleep.
What do you think the next question was? How about Rent to Own? So I decided to put this all down on paper so folks can look at it and hopefully make an intelligent decision. So here goes.
How does it Work?
When it comes to Rent To Own, There are normally two kinds. Lease with an Option to Purchase, or a Lease-Purchase. The difference between the two is pretty simple. Lease-Option gives you the ability to purchase after the term is completed. Lease-Purchase is a binding contract that requires the purchase at the end of the term.
When you decide to Rent to Own, pricing may be established at several time frames. It can be established prior to contract, at the time of contract, or sometimes at the end of the agreed term of the agreement. Term of agreement can be months to several years and is normally negotiated prior to contract. Remember this is a legal and binding agreement and can help or hurt the buyer in the time that it is active.
Payments are made to the owner just like rent and are normally higher than what the market is for rent on a home or condo. The reason for this is during the negotiations the seller will tell the buyer how much they must pay each month as rent. This amount does not go toward the purchase of the home. The seller will then say the amount plus another dollar amount will be the cost of the monthly payment and X amount of the payment will go toward credit for if the home closes.
Just because you enter into one of these agreements, does not automatically qualify you to get a loan from a lending institute in the future. Improving your credit, reducing your debt to income, paying down to less than 10% on any credit card, and staying in good standing on other debits are a few of the things that will determine your creditworthiness.
The majority of the time the buyer will also take on all other aspects of the property including maintenance, repairs, taxes, HOA fees, assessments, and improvements.
Option money is normally a part of these agreements and is usually a percentage of the purchase price. And yes that money is due at the time of the agreement.
There are no standard contracts for this type of purchase so it is advisable that the buyer obtain the services of a real estate agent and an attorney who will help them craft a document that hopefully keeps the buyer's interests a little more secure.
Pros and Cons of Rent To Own.
Pros
Other than any upfront money for the property, you as the buyer build up equity toward the closing each time you pay your monthly payment.
By securing the property in the contract you avoid the possibility of someone else coming in scooping up the property with a higher bid than yours.
Qualifying for a loan at first is not necessary. You can have the home till the end of the contract period. But you need to make sure you are not late and that you pay the full amount for any repairs, rent, or taxes while you are under contract. The best info I can give you is if you are in a financial mess when you do an owner financing is to get your life ready for when you have to be accountable in your loan.
Cons
Rent fees are going to be expensive. In order to get the home, you will be paying rent as well as a certain amount in order to be able to eventually close on the home.
The option money does not come back to you. When you put the deposit down, whether it is 1% or 10%, if the deal does not go through that is part of the cost of the purchase.
You better do a home inspection before you purchase. You will now be responsible for all bills on the home. So not what you might think is a simple repair comes out of your pocket, not the owner.
What happens if the market goes down? In 2007 the market somewhat crashed and those on a tight budget and home suffered most. You do not want to be in this predicament. Ever.
You decide to not purchase. If this happens, you lose the money you have already paid in toward downpayment as well as any upfront money you have paid.
Prices of homes go down. What if something like the covid19 virus comes about and the market gets really crapy? You may lose equity over the time frame and also it may be necessary to lose at a substantial rate if you decide to sell quickly.
You may decide that owning is not what you want. You might be transferred to a new city, or you could have a change of status in your job. It could be as simple as the school district that you want your child to be in has changed and it is too far away. What happens to the cash you have paid the seller so far along with the initial downpayment? The seller normally gets it all as part of the contract.
The seller is always in control. By simply being late on one payment, be it the first or the twenty-third, or not paying for a repair bill in an appropriate time can put you in contract default. At that point, the owner is not required to honor your contract.
Some things you have no control over. If the owner becomes financially unstable and they default on the loan, or they take an additional loan out on the property and do not pay it and the home or condo falls into foreclosure, the house will go to the bank and you will be asked to vacate. It could come to a point that the seller just changes their mind and does not want to sell. This would be a very expensive legal battle and you have to pay for it as well.
Think about the improvements that you want to do. Are you safe in doing them? Or are you improving the seller's property that you do not have rights to if they decide to stop the rent to own?
More Cons than Pros
Let's face it, there are so many more possible shortcomings to Rent To Own that you really have to ask, "If this were to go badly, am I ok with losing everything I have put into the home?"
Talk to professionals before you decide.
Get a professional REALTOR. I can help you get through the maze of homeownership. I work with lenders that if your scores are not where they should be, well we may wait to get you back in line so purchasing is a breeze. After all, this journey is All About YOU!!