real estate

Rent-to-own deal can be risky

Steve McLindenq_v2.gifDear Real Estate Adviser,
I see many rent-to-own home offers and Web sites now. But are rent-to-owns actually safe to buy? For many buyers and sellers, I get the feeling this is a last resort.
-- Vicki

a_v2.gifDear Vicki,
With a challenging housing market still prevailing in many parts of the U.S. and tighter mortgage restrictions, rent-to-own has indeed become a viable last resort for many owners and would-be buyers.

First, to avoid confusion, let's examine the difference between a rent-to-own home and lease-option deal. In a rent-to-own, also called "rent-to-buy" or "lease-purchase," the agreement calls for the renter to purchase the house by a set time, which is typically 36 months hence.

By contrast, in a lease-option, the lease agreement contains a provision giving the renter the option to purchase the place at some point. Both typically require the renter/buyer to pay additional monthly rent premiums to "buy down" the price of the home in addition to paying an upfront sum, ranging from 3 percent to 10 percent of the purchase price as a down payment of sorts. Most such agreements, but certainly not all, specify a locked-in price.

Let's start with the positives of rent-to-own. You are not frittering away money on rent, and you get to take the house for a prolonged "test drive" to find out if its design, road infrastructure, neighborhood, schools and area resources are adequate for your needs. You also have the flexibility to walk away at the end of the term.

On the flip side, some seller/landlords, particularly in lease-option deals, don't disclose they are going through foreclosures and their renter/buyers can end up losing their fees and premiums as well as the roof above their heads as a result. To avoid that, contact your local tax assessors' office, which may have lists of local foreclosed homes or try Foreclosure.com, which has relatively up-to-date, state-by-state listings of preforeclosures and foreclosures.

More concerns: Rent-to-own and lease-to-own tenants don't have the protections that traditional buyers do, should they fall behind in payments. If evicted, you would stand to lose any fees and extra rent premiums you've paid over the years. And of course, at the end of the rent-to-own period, the buyer/renter will still need to qualify for a mortgage. If he or she can't, they may lose their investments. To avoid this possibility, make sure to ask for a contingency clause in the deal calling for the return of a large percentage of your fees and rent premiums if you can't qualify for a loan.

And many rent-to-own buyers who agreed to a set price a few years ago found their homes substantially devalued by the time they were set to buy and couldn't get financing to cover the difference. Or if they did get financing, buyers with still-damaged credit found their terms less affordable than what the sellers were paying monthly. Other potential issues you should address contractually include who pays for repairs at the house and what happens if the owner dies. Be sure to get all the details explicitly spelled out in a custom contract. Don't use a standard form.

If you can, buy the home with a conventional mortgage at today's depressed prices. If your credit rating is getting in the way, then take concrete steps immediately after signing the rent-to-own agreement to repair your rating by the time you're set to buy. Otherwise you'll be in the same position you are now.

Good luck!

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