Rent to own: A delicate balance
November's here. Temperatures are dropping, and the local housing market has cooled along with the air. But even if buyers aren't lining...
Special to The Seattle Times
November's here. Temperatures are dropping, and the local housing market has cooled along with the air. But even if buyers aren't lining up, flexible sellers have options.
In a cooler market, one available option is a lease-purchase arrangement, commonly know as renting to own. A lease-purchase deal can connect sellers to a range of potential buyers — those trying to overcome credit problems, for instance, or those who haven't been able to save enough for a down payment.
Lease-purchase deals offer several advantages for buyers and sellers, but they have disadvantages, too.
Tim Cutter of Puyallup says he wasn't interested in a lease-purchase deal when he decided to buy a new house. But he changed his mind after his mortgage broker told him he didn't have to sell his house right away, and he listed it as a lease-purchase in August.
This is an agreement to rent a home and buy it in the future. Two documents are used: the lease or rental agreement and a contract for the future purchase of the property. Details vary widely, but they will always include the sale price and time frame for buying the home and will often set standard terms such as closing costs, disclosure agreements, inspection rights and the consequences if either buyer or seller backs out of the deal. Depending on the contract, lease-purchases can significantly favor one side or the other, so it's crucial for buyer and seller to read the fine print and agree to the terms. If the details seem unclear, hire a real-estate attorney.
This ranges from 1 to 5 percent of the agreed-upon purchase price and typically are paid up front. In most cases this payment gets credited toward the purchase of the home.
This is the amount above fair-market rent that the tenant pays each month. It generally is credited toward the down payment at the time of the purchase. A mortgage lender needs to be able to verify the premium paid each month, so it is important to keep clear records, such as copies of canceled checks. Tenants who don't buy the property usually lose the option fee and the accumulated rent premiums.
This is the length of time that the tenant leases the home before buying it. In general, longer option periods are preferred by buyers who need time to build equity and repair credit. In the end, though, that could mean more money lost if the tenant is still unable to buy when the deadline comes because a longer option period means that much more paid as rent premium will be lost.
He learned about the pros and cons pretty quickly.
Cutter says he got lots of interest right away, received a down payment and the first month's rent from potential buyers — then as soon as they'd moved in, they stopped paying.
Four months later, Cutter managed to evict them and has the house listed again. He says he's learned that lease-purchase buyers often don't complete the purchase.
In spite of that first bad experience, he still says the arrangement is worth the risks.
Mostly he's found that the people interested in a lease-purchase are in some kind of transition — going through a divorce, for example, or starting a new job. And while his plan is to ultimately sell the home, he see a lease-purchase deal as an investment.
If you're considering buying or selling in a rent-to-own deal, you can use a lease-purchase service that brokers such deals or arrange one yourself. However, be cautious, especially of services that offer to buy the home of your choice and then lease it back to you on a rent-to-own basis. These services can vary widely in terms of fees and overall credibility.
Here's a quick look at how lease-purchases work:
Be cautious of lease-purchase services that offer to buy the home of your choice and then lease it back to you on a rent-to-own basis. An online search will turn up a number of these services, which can vary widely in terms of fees and overall credibility.
One thing to look for with lease-purchase services is where the upfront fees go. In some cases, the service will ask for 5 to 7 percent of the purchase price and keep that money instead of applying it toward the buyer's down payment.
An appreciation fee of 13 to 16 percent might be tacked on and compounded yearly. Under this scenario, a buyer who leases a $250,000 home will have to pay as much as $290,000 for it at the end of a one-year lease. At the end of two years, the purchase price could rise to $336,400.
Before signing with a service, check it out.
"Ask for references and talk to other clients that have worked with them," advises Jessica Zenner, senior real-estate investment specialist at America's Home Buyers Network. "Find out what fees are charged, and be sure you know exactly what you'll pay at closing."
Sites such as RentClicks.com have also opened new avenues for private-party arrangements, which buyers need to review just as rigorously as those of lease-purchase services.
Private lease-purchases typically don't include service or appreciation fees, so they can save sellers money.
|Rent to own: Weighing the choice|
|Here's a look at the advantages and disadvantages of private lease-purchase arrangements, as collected from online home-buying sites: (These include realtytimes.com, homebuying.about.com and homerentalads.com)|
|• You pay only an option fee up front — a minimal amount compared to traditional down payments.
• If you've got a few credit dings, a lease-purchase can buy time for making repairs. Also, some sellers will agree to provide financing.
• Rather than just renting, you're building equity. And if home values start rising, you're already locked into the price — meaning that you've gotten in at a good time and are earning that much more equity.
• You get to take the house for a test run. Since you're right there, you'll learn about any quirks the house has or repairs it may need. You'll also find out firsthand if the next-door neighbor's personal habits are a deal-breaker.
• You're free from property taxes and insurance until the house officially changes hands. Also, the seller generally bankrolls any repairs while you're a tenant.
|• Beware of loopholes in the contract that could get you evicted, leaving the seller holding your cash. In some cases, a single late payment might be all it takes.
• Truly unscrupulous sellers may offer a lease purchase with no intention to actually sell. Instead, they're interested in collecting higher-than-average rent and then trying to force the buyer out.
|• You've got a great chance of netting your full asking price. Lease-purchase buyers often have limited options and are especially motivated to make the deal go through.
• You'll typically get top-dollar rent for your home. With lease-purchases, only the portion of rent that's higher than fair market value will be credited toward a down payment, so buyers generally pay fair market plus a premium.
• Option fees are nonrefundable, so even if the buyer defaults or decides not to buy, you keep the money. The seller often keeps the rent premiums, too.
• In deals handled by the sellers, there are no real-estate commissions or lease-purchase service fees, both of which are generally around 6 percent.
• Lease-purchases may be a safer alternative to carrying a mortgage because you'll have a chance to check out a buyer's payment habits. If they turn out to be spotty or nonexistent, it's much easier to end a lease than foreclose on a mortgage.
• The buyers are likely to take good care of your house because they're planning to make it their home.
• You enjoy tax benefits while the property is still in your name.
|• If you're eager to cash out your home and move on, a lease-purchase isn't for you. Option periods generally last at least one year, and sometimes 2 or 3.
• Be aware that eager tenants might start changing the home before they actually own it. Let them know they'll need your written approval before beginning any home-improvement projects.