My parents want to purchase the house they're renting and have had a verbal agreement with the owner to do so. They believe that now is the time to go ahead. How do these deals work?
Yours folks might remember that old Burt Bacharach song, "Promise, Promises," and its lyrics that lament, "those kind of promises take all the joy from life." Well, they'll surely want to get that verbal promise in writing, assuming it's still a good one. I suspect it will be, particularly with the market dragging along in most regions. In fact, the owner may be a little sorry he didn't try to establish a fixed future purchase price for the house before values went south. Owners are sometimes content to keep those agreements at a verbal level so they can see which way the market is heading without making a real commitment.
Right now, the leverage is probably in the hands of your parents. But before they get this pact in writing, they'll want to determine the type of rent-to-buy arrangement they want to make. I strongly suggest a lease-option arrangement where they will retain a legal option to buy the property at a set price after a given period, not an obligation to buy it. This affords them more flexibility in case their circumstances change, as circumstances are wont to do. A rent-to-own arrangement, also referred to as "lease-purchase" or "lease-to-own" deal, is generally a binding agreement for a renter to buy at the end of a set period. In a seller's market it's harder to get landlords to agree to lease-options. But in many respects, the timing seems right for your parents to talk with the owner about structuring an option arrangement.
Rent-to-own arrangements are generally
structured so the renter/buyer agrees to pay above-market
rent (20 percent and up) over a period ranging
from one to three years in order to accumulate
the equivalent of a down payment. Thus, if your
parents are paying $1,200 per month in rent, they
may be asked to boost that to $1,500 per month
for say, a 30-month period, thus accumulating
a $9,000 "down payment" in that period.
Typically, the buyout price at the end of these
deals is at least 110 percent of the price the
owner originally plunked down for the house.
An advantage of rent to own is that lenders generally require little or no additional down payment and will assume a mortgage that people like your parents may not have been able to get on their own, particularly if they suffered past credit problems. (By the way, your mom and dad will probably be expected to handle maintenance and upkeep on the house during this rent phase.) Make sure you or your folks get a few "comps," or comparative prices of homes that recently sold in their neighborhood, to give them a foundation for their offer. Realtor offices are pretty good about releasing some of these because they're hoping to get your business.
The good thing about locking into a price now is that most markets are flat and unlikely to fully segue into recovery for another year or more. That might make the current owner apprehensive about trying to build future appreciation into the lock-in price. Remember, try to get a lease-option instead of a lease-purchase. It is a buffer against the unknown.
Here's wishing your folks the joys of future homeownership.