Rent-to-own could be a win win option

With the nuts and bolts firmly tighten on financing and not too many buyers available to afford the necessary credit or down payment, it is understandable why rent-to-own could be a win win option for both the sellers and potential buyers.

Rent-to-own, lease-option, lease option agreements or rent-to-buy option is an agreement where buyers are require to pay extra monthly rents plus up-front fees of about 5% of the purchase price. The normal or regular rent will go to the owner and the extra or additional payments will be use to buy down the price of the home for the prospective buyer.

Google Analytics report of the newly launched and popular web site ApartmentQuester.com has noticed a frequent and an increase interest in keyword searches on their site for words relating to rent-to-own that they have added “rent-to-own” as a search option on their web site. Apartment Quester also offers a listing special that allows Agents to list their rental property for only $1.00 per month.

If properly drafted with the advice and consent of a real estate attorney, the process could be trouble free for both the prospective buyers and sellers. There are however, some cons and pros that one needs to consider before signing a rent-to-own agreement.

The Cons

Can’t arrange financing: If you can’t arrange financing at the end of the rental period, you may have to forfeit all the extra money you invested. To avoid forfeiting your hard earned and good faith payment, you will need to specifically spell it out in your contract what you want. This is a buyers’ markets, you may have the leverage to get a contingency clause specifying any up-front fees and extra rent be returned if you don’t qualify for a loan.

Falling behind in payments: There is little protection for buyers who fall behind in payments. If you fall behind and are evicted, you lose any up-front fees and rent premiums you paid.

Declining home prices: Buyers may be hesitant to lock into asset price a year in advance, considering how much home values are sliding down hill. Again, you will need to specifically negotiate this in your contract.

Renters have been burned: To put it bluntly, some homeowners are scams. Renters have been burned by doing lease-option deals with owners who are going through foreclosures. After months of taking the inflated rent payments even though they are in foreclosure, the owners finally have the home repossessed by the bank and the renters are served with eviction notices and are out their investments.

Walk aways: Pitfalls exist for sellers as well. Renters may decide to not exercise their options if prices fall. That can leave sellers with large paper losses by the end of the lease compared with if they had sold the home when they originally planned. They are also stuck carrying the costs of the home until they find other buyers or tenants.

The Pros

Chance to experience homes and neighborhoods: Since the contract is typically written to close in 12 to 36 months, it gives buyers the chance to experience homes and neighborhoods without having to make major commitments.

Build up down payments
The main reason why buyers go the rent-to-own route is accumulate enough money for down payments

Improve your credit reports
Improving credit report is necessary and very important when trying to obtain a mortgage.