Saturday, October 20, 2007

Rent To Own

Rent to Own : Bain or Blessing

With the Housing Market being touted as in "Worst Slump in 10 Years", numerous buyers and sellers have been asking about the Rent-to-Own concept. Though many Realtors know the market is sound and only returning to "normal' from the torrid rate of the late 90's and first five years of the new millennium, the Media's comparative lingo doesn't realize that sales remain above levels seen at the beginning of that 10 year "wonder years of real estate".

Regardless, the question on Rent to Own has arisen. Rent-to-Own contracts or Land Contracts(often also called Installment Contract) have been around for decades and are not a new form of ownership. One of the misconceptions of Rent-to-Own relates to ownership.

The purchaser/tenant frequently feels that the property is under contract and that he/she has only delayed the final settlement to a later date due to any one of a number of circumstances(saving closing costs, finding a down payment, etc). In reality, during the rental segment of the transaction, the purchaser is actually a tenant with the rights and responsibility of any tenant.
Occasionally, the seller/landlord may provide more rights for property improvements and redecorating than a normal lease agreement would but seldom is it in the tenant/purchaser's benefit.

This relationship is stated in Land Contracts due to typical lengthy definition of the terms and conditions during the leasehold(rental) period but can be not directly noted so that the novice home purchaser will understand this difference. This where a sound Real Estate counselor can help.

In Rent-To-Own/Land Contracts, there are three basic parts:

1. Option
2. Leasehold terms
3. Final Sales Price and terms

In the Option section, the seller/landlord asks for and the buyer/tenant agrees to provide "X"
dollars to seller/landlord for the right to hold an option to purchase the home at a later date.

In the Leasehold terms, the seller/landlord details the rental terms and monthly rent is manner
similar to any lease agreement. One needs to pay particularly close attention to this section
should part of the rent apply to closing costs or being "saved" for a future down payment.
In cases that moneys from the rent will apply to closing costs or down payment, the buyer
tenant must ensure mechanisms are in place to account for the savings that should be
happening.

In the Final Sales Price and Terms, the seller/landlord details the final sales price and terms
of the sale(i.e. home inspections, termite, etc).

You will note a frequent reference to the "seller/landlord details" so that you wander what the buyer/tenant's input is. Typically, this input is limited to the buyer's/tenant's desire to live at the address that is being rented/sold.

This is typically true as the Seller would love to sell the property out right but is considering rent-to-own as a means to lock in a buyer. Yet, the Seller has alot of downside on the Buyer's possession and renting for a lenghty period. What if:

a. Buyer skips town after 4 months
b. Buyer fails to take care of property then wants to walk away from deal
c. Buyer begins to find lots of faults with property and seeks to cancel contract

And these are only to name of few.

Obvious the Buyer has numerous concerns about the Seller's future action(i.e. never puts "extra on rent" towards closing costs savings. Yet, the truth be known, the Seller is in control as he has the house that he can wait for a better qualified buyer or buyer/tenant. Secondly, the typical individual seeking rent-t0-own has limited funds or banged up credit and couldn't buy a home if the Seller wasn't willing to rent the property for later purchase. As a result, the Seller assumes a lot of risk with an underfunded buyer or one that historically hasn't handled paying bills well.

Thus, on Rent-to-Own, BUYERS BEWARE!!!
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