real estate

Who loses when the lease-to-own term ends?

Steve McLindenQuestionDear Real Estate Adviser,
My term is up on my lease-to-own home. Unfortunately, the property won't appraise for the price agreed to under the original terms of the deal. Do I lose my $10,000 down? The lease expired in November, and I'm now on a month-to-month arrangement but still paying the higher rate.
-- Jacki G.

AnswerDear Jacki,
Alas, the $10,000 you paid in the form of a deposit/down payment is likely not refundable either way you turn, nor is any above-market-rent premium you've been paying monthly. Such is the risky nature of "lease-to-own" in residential real estate.

You're one of thousands of would-be buyer-renters who agreed to sales prices a few years ago. Now those residences have devalued by the time the lease-to-own terms expired, typically after two to five years. Many of these folks, including you possibly, have had problems getting financing to complete the purchase.

For those unfamiliar with lease-to-own, also known as rent-to-own or lease purchase, the buyer-renter typically makes a down payment. The buyer-renter pays an added premium atop each month's rent, a portion of which is added to the down payment to accumulate equity. (A lease option, by contrast, gives the renter the option, but not the obligation, to purchase the house. Such agreements usually specify a locked-in sale price.)

As you didn't buy at the end of the term, has the landlord informed you that you have lost your right to buy? Have you been informed that you have lost any equity you accumulated? Oftentimes, sellers will set up contracts, so they can snatch your deposit/down payment or other equity if you violate any part of the agreement obligation. It seems the owner is at least implying that your deal is still on by accepting the premiums.

Given market conditions, it's unlikely the owner will kick you out because you didn't buy, but he or she could. It would behoove you to straighten out this arrangement pronto. Much of your fate with this home probably lies in the wording of your contract, which was likely composed by the owner. I suspect you'll find that the fine print benefits him or her greatly. Many owners who "sell" this way are not motivated by the desire to help out an earnest but struggling tenant.

They simply haven't been able to sell their houses conventionally. I might add that buyers who enter these deals rarely have enough resources to hire an attorney and usually aren't aware of how few protections they're actually afforded in the contract.

Not to disparage the lease-to-own game entirely. A lot of folks with poor credit or inadequate down-payment monies -- sometimes foreclosure victims -- have been successful in getting back into homes this way. But more frequently, I'm afraid, the buyer does not or cannot finish the deal.

Most of the time, the cost to the buyer-renters turns out to be far greater than if they had just done a straight rental and banked the deposit and extra rent to repair their credit and make a down payment on a conventionally purchased home.

Of course, every deal is different, and yours might be a good one with a well-meaning owner who wants to work with you. If you do go ahead and buy, your $10,000 and extra rent technically won't be lost because they will be applied to the purchase. Granted, they may not even cover the home's value loss combined.

Good luck in remediating the situation!

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