Rent to Own Contracts: What to Look For in the Fine Print
Renting to own is one way for a family with a relatively low credit rating can achieve the dream of home ownership. These arrangements can work well, and many families have used them successfully. Not all deals are created equal, though, and before signing on the dotted line, you need to understand the commitment you’re making.
The details of a property sale, often called the "fine print," are not just a bunch of very small words: they are what separates a good deal from a bad one. Seemingly inconsequential facets in these areas can magnify into crucial deal making or breaking facts --depending on the unique circumstances of each contract.
As a buyer, it is important to approach a real estate deal with as clinical a mindset as possible. Place all of the personal feelings for a particular property aside before making life-changing decisions, and meet the situation with as much clarity and scrutiny possible.
Overcoming Limitations of the Financial Past
Households with a below average credit history often find that they cannot buy a home without paying a large down payment or exorbitant interest. Some aren’t able to borrow at all. These families can circumvent the long-term consequences of bad credit by entering into a lease option agreement with a property seller. This arrangement allows you to rent the property and gradually build up your credit.
A lease option agreement takes the rental terms of a normal tenant lease and adds an agreed-upon sum to the monthly payment. For example, if the monthly payment for a home is $1400.00, the lease option terms would set that figure at a higher rate, such as $1650.00. The additional $250 paid every month is called home buyer credit, and it goes into an escrow account that accrues over time. The escrow account allows the lessor to build up credit to a sizable sum that, upon closing, reverts to them to be used however they see fit. In this example, at the end of a two-year period, the lessor will have saved up $6,000. They can use this money as they see fit: as a down payment, as an earnest-money deposit, or to help cover closing costs.
"Lease Option" Vs "Lease Purchase."
Although these terms sound somewhat the same, they have distinct differences. A lease option agreement is the better of the two, as it favors the buyer in a buyer's market. This type of an agreement allows the lessor to "lock in" a purchase price on a home they will rent with the intention to buy. In a shifting market, this is good because even if the property value increases, the buyer is still allowed to purchase at the lower "locked in" rate. The downside of this, however, occurs in a market downturn wherein the property value decreases, yet the buyer is still bound to the original selling price.
The saying "let the buyer beware" comes into play here. In a rapidly expanding residential real estate market, the seller could add a clause to the contract that allows them to raise the price of the home to meet market standards. This sort of a clause is what people refer to as the "fine print" that is so crucial to success.
A lease option agreement also places the responsibility for insurance, property taxes, and private mortgage insurance on the shoulders of the seller until the title is transferred to the buyer, so the tenant can save on those expenses while accruing credit for the eventual purchase.
A lease purchase agreement does not allow a tenant to build credit while occupying the property. This type of agreement simply means that the tenant has the option to buy the home only after the lease is up. A lease option agreement allows you to begin the buying process at any time during their existing lease.
Research the Seller and the Property
Usually, the buyer is the one being scrutinized, questioned, researched and investigated. Although this will always be the case, it is important that the same strategy is adopted by the buyer when considering the seller's integrity. Just because someone has accumulated property does not necessarily indicate that they did so scrupulously or by legal means.
- Property sellers may be trying to escape financial problems. Obtain a credit check on the landlord before negotiating a lease option agreement. Numerous derogatory marks on their credit history could indicate a pattern that is destined to repeat, meaning that they could default on their mortgage on the property as you are attempting to buy it. In this instance, any extra money paid to the seller towards the purchase (that should be going into an escrow account) will most likely be lost. Phone calls to the property from collection agencies and frequent collection notices arriving in the mail should also be treated as red flags.
Hire a Professional Building Inspector
- Cracks in the foundation, extensive tree root intrusion into pipes, lead-based paint, roof damage, basement mold, rotting exposed wood, clogged gutters and downspouts and other structural flaws can devalue the property a great deal. The seller may or may not be aware of such discrepancies, but the best way to be sure the house is structurally sound is to pay for a professional assessment. Minor repairable flaws can work to a buyer's advantage, as they can be used as leverage for negotiating a lower selling price.
History of Ownership
– You need to know the property's history. A Condition of Title report shows exactly how long the house has been in the present owner's hands. The longer that time is, the more stability the opportunity presents, as longtime owners typically build up more equity. A seller who has owned the property for a relatively short time is likely to have contributed little in the way of sweat equity, which translates to zero personal investment -- meaning that the property holds no sentimental value for them.
Face to Face Assessment
- Meeting with the seller in person can be very telling. Candid and casual face to face meetings can and should be arranged for showing, a building inspection, signing of a lease option agreement, and so on. Sellers who miss these appointments or show up late and conduct business in a distracted manner with little or no eye contact might warrant some deeper digging on the buyer's behalf. A shady seller could potentially string a buyer along during the lease option agreement, collecting the home buyer’s credit, and then back out of the deal once it is time to sell.
Consult a Professional
Before you close the deal, read the entire contract, slowly and thoroughly. There’s a good chance that there will be some elements that you don’t fully understand: most of us are not specialists in real estate contracts! If you have any doubts at all, it is well worth the cost and time it will take to have an attorney review the contract and point out any possible issues. Rent to own contract is a long term arrangement involving a major commitment, and there’s nothing wrong with being careful!
A thorough mindset is crucial when learning how to rent to own successfully. An unfortunate credit history does not have to stand in the way of home ownership as long as the buyer understands the available options and remembers some specific guidelines.
Time spent renting can be leveraged towards the ultimate purchasing of a home. Lease option agreements are far better than lease purchase agreements. Every seller must be researched and scrutinized just as any buyer is, and red flags detected during this process should be heeded quite seriously. In the quest to learn how to rent to own, the ultimate goal is a successful transaction and a happy home.