Rent-To-Own?

Rent To Own?

I have been asked about Rent To Own in the last few months as well as over the years and decided to take the time to address it in writing. People hoping interest rates will be lowered in the future are considering utilizing Rent-To-Own strategies, to consider this it is important to understand rent to own.

Types of Rent-To-Own

Typically, you would sign either a Lease-Purchase or a Lease-Option contract. The Lease-Purchase commits the tenant to buying the home, the Lease-Option gives the right not the obligation. Determining the future price can be done or described at the time of signing. Either way, typically only a portion of the rent will be applied to the principal cost of the house, and may be refunded in some Lease-Option contracts. If you find yourself comparing that to the amortizing portion of a mortgage payment, also consider the tax treatment of the interest portion of that mortgage payment.

When my clients ask me about “Rent-To-Own” I tell them up front that I do not think it is a good idea most of the time, with very few exceptions.? This is because, at least in theory, you are paying more than you would end up paying either renting or buying the home. I also have the sense that eviction is a common result and can be more common than homeownership conversions.

As far as costing more there may be exceptions, particularly with new construction. Sometimes it is easier for the developer to get approvals for apartments first and then convert to condominiums later than it is to get approvals to build and sell condominiums outright. The tenants during the initial period may find themselves in a position to negotiate a superior deal with respect to “Rent-To-Own.”??

Otherwise, any advantage must be negotiated and gained despite the fact that you are seeking to obtain an arrangement that is more valuable than renting or buying in terms of its features. In my experience, the Lease-Option is more common than the Lease-Purchase agreement. Another way to explain Lease-Option in terms of cost, is that instead of renting or buying, you are obtaining a rental plus an Option to purchase.? That rent plus option should clearly be more expensive than renting alone. The option alone has a value and you can potentially purchase an option separate from and without renting.? Similarly, rather than just purchasing you purchased an option to purchase on top of that - unless a special scenario such as the new constructed condominium approval serves to eliminate it, or at least credit it to your down payment.? Lease-Purchase should be less expensive than Lease-Option, since you are committing to buying which creates significant risk for the Renter-To-Owner.

I see “Rent-To-Own” being offered as an opportunity to buy with limited savings. I am also aware of 100% financing and assistance programs that can even cover closing costs: the less you put down up front the more you pay later is a rather consistent fact - but in real estate there are exceptions everywhere. However, Rent-To-Own might be easier to obtain than assistance programs or incentives: It is often easier to get a bad deal than a special one.

Here are some other considerations with “Rent To Own” deals:

Who was the last occupant??

Was it another rent-to-own tenant?? How many times has that happened on the property? What is stopping conversion if this is a serial occurance?

Other fees? Who is responsible for maintenance, insurance, taxes and utilities during the tenancy?

Shifting these expenses to the occupant when a conventional tenant would not pay them is another way these deals can be more expensive. The California Rental Purchase Act legislates some duty to maintain, repair or replace property on the landlord/seller other places may not have this.

What is the premium to market rent??

Besides shifting fees to the tenant, sometimes the rent is just plain higher than it would be on a standard lease.

Are you getting appraisals and inspections?

Before renting? Before purchasing? These are often done prior to purchase but not prior to renting, a good agent would advise you to perform these as needed and prior to contracting Rent-To-Own.

Where do you see yourself in 5 years?

This seems to preoccupy people the most - it is my perspective that if they can or could, they are most often better off buying at market then selling at market five years later rather than paying a premium in rent to have the option to purchase if their employment and other conditions are still suited to it.

Locking in a price on a home 5 years ago in the Bay Area would look to be genius at many points in time. There may be ways to negotiate a Rent-To-Own contract that is advantageous to the Buyer, it just is not likely: This is the option pursued by those without the resources to buy and the market is shaped accordingly. In general, the benefits of Rent-To-Own target a vulnerable segment of the population that needs better credit and/ or more money to be able to buy a home. Conversion to ownership is not guaranteed and many of the vulnerable are denied conversion.

Uche Nchekwube is a full service real estate broker active throughout the Bay Area. Text or call (415)322-0774 or send an email to [email protected] to get help to buy/sell real estate or more information on affordable housing. Information here is not legal advice, for information purposes only, deemed reliable at time of posting subject to errors, omissions and change at any time. DRE Lic no 01750107

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Other References

I wrote this article off the top of my head for the most part but I did some fresh research as well, reading or browsing several articles to inform or confirm what I wrote because things change and it is important to let new information influence one’s opinion.? Here are a few links for those articles as well as relevant California law,? if you wish to cross reference what I said with what others are saying.

2010 California Code Civil Code Title 2.96 California Rental-purchase Act

Investopdia Rent-to-Own Homes: How the Process Works

The Real Deal Repairs Evictions Dog Divvys Rent-To-Own Customers

Business Insider Private Equity Sold Them a dream of home ownership. They got Evicted Instead

The Street How Do Rent-To-Own Homes Work?

NerdWallet How Does Rent-to-Own Work?

Wallet Genius Rent-To-Own…Pros and Cons?

Bankrate How does Rent-To-Own work?

Homelight

??????How do Rent-To-Own homes Work?...????

?????What’s the Catch with Rent to Own Homes? 7 Reasons to Beware of These Deals

Rocket Mortgage Everything You Need To Know About Rent-To-Own Homes?

Quicken Loans Rent-To-Own Guide

Your Financial Launchpad Claims about Rent To Own what you can Believe