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Rent-to-own can be road-to-ruin

Dear Real Estate Adviser,
I am looking for a home to rent but want to know if I should first try to strike a rent-to-own deal. How does this arrangement work, and where do I find them? -- Joe H.

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Dear Joe,
In a "rent-to-own," or "lease-option," arrangement, the seller is giving you the right -- at some point in the future -- to buy the house at a price that is agreed upon today.

Usually, a portion of your rent over a specified lease period goes toward your eventual down payment. Typically, a tenant would pay slightly above-market rent over the lease period, usually from one to three years, for the right to enter into this arrangement. It's also common for the tenant to pay a fee in "option money," or for the privilege of having the option.

For example, if a house would typically rent for $1,000, you might be asked to pay $1,200 per month, a portion of which -- say $400 -- would be credited to your eventual down payment, depending on the contract you work out. Such an option usually expires at the end of the lease. In other words you must exercise the option before the lease expires.

But be careful. In some lease-purchase agreements, you are contractually obliged to buy at the end of the lease. Sellers and agents now often use the two terms interchangeably. But whatever name they attach to the arrangement, make sure you have the option.

The arrangement gives you more time to think about the deal plus provides a built-in structure to save for your down payment. It also allows you to discover any flaws in the home that may not have been detectable on an inspection and to get a feel for the neighborhood without committing to a long-term mortgage.

However, it's usually a good idea to first talk with a lender about eventual financing for the house before entering into a lease-purchase pact. Many would-be purchasers in these arrangements find they can't buy at the end of their lease anyway, often for the same reasons they couldn't buy at the start of the lease: bad credit, insufficient down payment, not enough income, etc.

In that event, you would lose your option money -- in the form of an up-front fee or added rent -- and any deposit you made. On top of that you would have paid a higher-than-normal monthly rent.

In areas where real estate values are quickly rising, locking in a purchase price on the day you sign the initial rent-to-own contract could be very profitable for you. If appreciation is significant during your lease portion, you come out smelling like a rose. The problem with this theory is that good lease-to-own deals are generally scarce in hot sellers' markets. If a seller sees rapid appreciation, there is no motivation to agree to sell at today's price a year or three years later. Only owners who've had their properties on the market a while, or had to move away quickly and are struggling with two house payments, are likely to agree to a lease-purchase arrangement.

Another potential disadvantage is that you may be obligated to tend to repairs and maintenance throughout your lease stage, instead of the landlord. Under most lease-to-buy contracts, any money or sweat equity you put into major improvements will not be reimbursed in the event you eventually opt out.

Where do you find rent-to-buys? Most real estate sales agents and real estate rental agents have listings. Also, try an Internet search under "rent-to-own homes" followed by your city's name. One site is Ownrent.com. Or, if you see a rental home that you really like, just ask the leasing agent if the owner might be agreeable to a rent-to-own arrangement. It's worth a try.

Good luck!

Bankrate.com's corrections policy
-- Posted: July 30, 2005
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