Recently this week I had clients ask me about the possibility of engaging in a rent-to-own scenario. They wanted to learn a bit more about this scenario and how it will affect them. I then thought... Why don't I share some insight with you?
For those of you who don't know me, my name is Torey (some call me "T") and I help urbanites interested in real estate connect the dot's between what they think they know and what they really need to know to be successful in today's markets.
The main goal I hear from the multitude of people trying to engage in this type of agreement is they are trying to reduce costs. The rationale is that "the cost of owning a home is lower than the cost of renting in many markets, so doing a lease purchase option will show my intent to buy and save me money with the landlord." Unfortunately these agreements do not work like that. Generally the landlord's thoughts are: "You wanna buy my house? Great now put some skin in the game." - They want a lot of skin in the game from you actually. The little known secret to the consumer regarding these agreements is that they are a landlord's dream. Beings renters are more transient and less reliable in nature, an overwhelming majority of renters who engage in this agreement never execute the purchase option for a variety of reasons and the landlord makes out like a bandit (by following the rules of course!).
Generally these transactions consist of two distinct features, the lease & the purchase option.
The lease is just like you average lease and rent is determined by the market. Don't expect a discount on rent. The term is the same as the purchase option. You are not generally asked to pay a security deposit because you are paying a down payment.
Now to the Purchase - Option: This part of the agreement enables you to lock in a purchase price today and gives you a deadline in which you need make the purchase by. In order to get the option, you must submit a down payment of 3-5% of the agreed upon purchase price, and pay a month rent premium on top of your monthly rent to the tune of $100-$300 a month. The rent premium holds the option agreement. If you are late on a payment, it could jeopardize your entire down payment and rent premiums to date as well as lose the right to exercise your option.
The benefit to engaging in a transaction like this is that you have the ability to live in an potentially own your dream home today, as well as potentially buy a property at or below market value if the market goes up since your option agreement was made.
The drawbacks are plentiful. You, as the consumer, are taking a great deal of risk for a marginal reward. You are risking losing your deposit monies and rent premiums if you do not make the purchase (which happens most of the time), you are paying more each month, and you may be required to shoulder similar responsibilities for upkeep as if you owned the house. At the end of the day, it all adds up to a lot of $$$.
In my opinion, if you are trying to buy a house today and do not have the credit to pull a mortgage, your best option is seller financing or buying subject to their existing mortgage. Seller financing means that the seller owns their property all cash and is acting like the bank to you. Subject-to means the seller owes a mortgage and you have the deed transferred into your name and are paying the sellers mortgage on behalf of the seller. Not all owners have the same motivations, but some may. If all else fails, renting is your best option.
If renting is what happens, try to be diligent with your finances and get on a fast track to home ownership. If it is meant to be, it will happen.
DISCLAIMER: All rent-to-own scenarios are different based on the individual needs of the parties involved. I described the average rent-to-own scenario.
--
Torey Howarth knows & sells real estate. During years of trial and tribulation in pursuit of entrepreneurial success, things were not always "right", but they are now...
As a millennial playing in the washed-up sport of real estate, Torey found his niche and continues to relentlessly exploit it for all its worth. He has 1 goal in mind: Making dreams become reality (Don't discount his hustle and dedication to get there).
#ClosingTalk is a weekly off-the-cuff show (released Tuesdays @ approx. 3PM) that feature's Torey educating you on all things Philadelphia real estate. No BS, just value and insight. Because you earned it.
Torey'sThoughts is a weekly show (released Fridays @ approx. 3PM) focusing on anything but real estate.
Find Torey here:
Website: http://ToreyHowarth.com
Broker: http://kwphilly.com
YouTube: https://goo.gl/5KWHw8
Facebook: http://facebook.com/ToreyHowarthPHL
Linkedin: http://linkedin.com/in/toreyhowarthPHL
Instagram: http://instagram.com/toreyhowarthphl
Twitter: http://twitter.com/ToreyHowarthPHL
Medium: http://medium.com/@toreyhowarthphl
Snapchat: toreyhowarthPHL
