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 Dear
Steve,
I'm considering a rent-to-own program where a realty company
will buy a home for me and I will pay for 14 months while I repair negative credit.
After 14 months, I will buy the house at a locked-in price. Does this sound legit?
I'm a single parent making $70,000 a year but am having trouble coming up with
a down payment, plus I have past credit and tax issues. Since this is now a buyer's
market, I thought I'd better act.
-- Stephanie
 Dear
Stephanie,
The vast majority of these programs are legit and there's
no reason to suspect the company that you mentioned (but is not named here) would
not be on the up and up. In fact, we're hearing more and more from potential buyers
these days about such rent-to-own arrangements because they're typically offered
by real estate companies as a way to jump-start activity in sluggish real estate
markets.
A big selling point for rent-to-own,
also called "lease-to-own" and "lease-purchase,"
is that the lender usually requires little or
no down payment and will carry a mortgage you
may not be able to get on your own. In some cases
-- not in yours from what you describe -- the
buyer gets to "test-drive" the house
and neighborhood without a long-term commitment
while getting a feel for the joys and obligations
of homeownership. You'll probably be expected
to handle maintenance on the house during the
lease portion, by the way.
As part of the rent-to-own arrangement,
a tenant typically agrees to pay above-market
rent (20 percent and upward) over a set period
to build up the equivalent of a down payment with
the excess. The buyout price at the end of that
period is usually at least 110 percent of the
price the investor or company originally paid
for the house.
Yes, you will be locked into a purchase
price, though that may not be the plus it was
five years ago when values were soaring. In fact,
values may not improve at all in the next year
and some may even continue to drop. If they do
drop, then in late summer 2008 you'll be buying
at yesterday's higher prices.
There is another caveat. The 14-month
period you're given may not be long enough to
sufficiently repair your credit to qualify you
for a lower mortgage interest rate. Realtors who
are experienced with these transactions say a
two-year period is better in a program that also
includes credit counseling. Many would-be buyers,
they say, discover they can't sustain the high
payments in the long term for the same reasons
they couldn't buy outright in the first place.
That begs this question: If you're going to summon
the discipline to clean up your credit over a
given span, why not start now and position yourself
to buy conventionally instead of risk losing that
added premium you'll be paying each month?
By the way, I much prefer a lease-option
arrangement where you retain the legal right to
purchase the property after a given period but
aren't expressly required to buy it. Some won't
accept those terms; others will. Incidentally,
some of these programs' terms are much more flexible
than they were a few years ago now that buyers
have more leverage. Don't be afraid to negotiate
a better deal.
Good
luck on getting into your own dream home. But be prudent and realistic in the
process!
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