The Up (and Down) Side to Rent-to-Own

Filed under: Your Home, News & Trends

We weigh the pros and cons and try to figure out when the rent-to-own option makes sense.

When Niki Horace was having trouble selling an investment property just outside of Seattle, a pair of potential buyers stepped forward. They asked if Horace would be willing to "rent-to-own." Since they didn't have the best credit, the agreement seemed to make sense. Horace and her new tenants set the purchase price and a fixed rent rate, and the tenants put down $10,000. Each month for two years, a portion of the rent would go toward the price of the home. Then the tenants could pay the remaining balance -- or opt out and move on.

After two years of her tenants being the "perfect renters," Horace realized their rent was late so she went by the house. The place had been completely gutted -- except for the mother-in-law apartment, which the tenants had turned into the largest marijuana-growing operation in the state of Washington, according to the eventual police report. (Pause to wrap your brain around that.)

The house was condemned by the city and Horace had to sign it off to authorities. Investment down the drain (or, pipe...). Still, despite the drama, Horace says she'd do it again. "Renting to own is great for the seller who's having a difficult time finding the perfect buyer in this economy," says Horace.

Perhaps as a result of the mortgage crisis (and the economic fallout thereafter), renting to own is becoming more and more popular across the country (take a look at this New York Times article). But does it make sense for someone looking to buy a home? It can, but there are potential challenges.

"I see rent-to-own hopefuls come through our offices quite regularly," says Troy Costa, National Wholesale Account Executive for Plaza Home Mortgage in San Diego. "The single biggest pitfall is when the seller is trying to credit the buyer's rent-to-own money toward the expense of closing instead of toward the actual purchase price."

It's why it's essential that a real estate lawyer is hired to help write the contract in the beginning.

"Make sure you get a contract. Seriously: GET A CONTRACT," says Horace. "Clearly state who's responsible if something goes south, or if the house has a problem, such as a pipe burst that causes damages. Also make sure the note/lease is filed with the city, so there is no room for argument if something really serious happens."

If all of the kinks are sorted out ahead of time, the experience can be a positive one. This was the case with Corey Schiller, who is currently renting to own at the The Residences Ritz-Carlton Philadelphia.

"[Renting to own] allows you to get what you want, while limiting your risk," he says. "For me, I wanted time to furnish the place, sell my current house, move in gradually and evaluate if the building was the right fit. That's a lot to balance at once, and I felt more comfortable about the transition in this scenario."

Schiller wouldn't recommend it for someone who's pinching pennies. Because you put down a large deposit, plus pay a sum that covers both the rent and a percentage of your future mortgage, it does cost more than the typical renting experience or a straight-forward purchase. But in a situation such as his -- residences are moving quickly (and you want to snap one up) -- you probably want to take your time and make sure that you're making the right decision. Then renting to own might just be the way to go.

And in Schiller's case, all worked out as planned: He's currently in the final stages of his mortgage approval to become a homeowner.


We asked Troy Costa to give us a list of pros and cons to renting to own. Here's what he said:

PROS
1. You can move in immediately -- no need to wait on the bank or a closing date.
2. You'll have time to save up for a down payment, which will ultimately reduce your mortgage.
3. You can "try on" a home and see if the location, light, style works for you.
4. It's much easier and affordable to change plans. If something unexpectedly comes up and you decide to move, you don't have to hassle with selling your property -- you just leave it behind like a rental.
5. During the lease period, the landlord generally handles repairs, just make sure that's stated in the contract.
6. If you are a first time home buyer or someone who is credit challenged, it gives you the chance to figure out how to get financing for the full purchase price.

CONS
1. There are no guarantees. A seller can change the deal if a better offer comes along. It's important to use a knowledgeable real estate attorney to ensure that doesn't happen.
2. You may miss out on prime mortgage interest rates. (The good loan rates that might be available to you now, could be gone by the time you're ready for traditional financing.) The home's value may also drop in a bad economy, but you're locked in at the original purchase price, meaning you're not getting the best value for your money. (Of course, the value of the home could also go up, and you'd be getting a great value.)
3. Tax advantages currently favor the home owner/mortgage payer versus renter/lease purchaser.

 

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