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Hello, everyone! I've learned so much from the general forums! Here's my question for all you knowledgable people: Does anyone know about the rent-to-own situation? I'm talking about houses. Does a person have to qualify for a mortgage and go through all the paperwork, or is it a rent-til-you're-paid situation? I suppose one could sign up for that plan and quit later if one changes his/her mind? Are there other costs involved, like downpayments? Any help would be appreciated.
J
Hello, everyone! I've learned so much from the general forums! Here's my question for all you knowledgable people: Does anyone know about the rent-to-own situation? I'm talking about houses. Does a person have to qualify for a mortgage and go through all the paperwork, or is it a rent-til-you're-paid situation? I suppose one could sign up for that plan and quit later if one changes his/her mind? Are there other costs involved, like downpayments? Any help would be appreciated.
J
Usually it's just a rental with an agreement that part of the rent can be used for a down payment at a certain point. There is no purchase contract or qualifying necessary until you are actually going to purchase the property.
It's usually done for buyer with bad, or no credit, or seller want more than house is worth. It can be advantageous for both, but not always..It can also bite you in the butt.
Do plenty of research before entering into such a contract.
Google "Rent to own house" Lots of info available...
AOL Search (http://aolsearch.aol.com/aol/search?encquery=fbe3e14be59c0a83a27ec13e45d50964bb 8e8111665632cc&invocationType=keyword_rollover&ie= UTF-8 - broken link)
Another Rent-to-Own scenario could also be a Contract for Deed Sale. In this scenario the rent payments apply 100% to the purchase and are normally the P&I (principal and interest) of the amortized sales price.
In a Contract for Deed, it is an outright sale unlike a lease purchase described by Donn, but the key difference between this and a more conventional sale is that the deed transfer does not occur until all the sales price is paid. Usually if the buyer does not complete the payments as agreed in the contract, the deal falls through and the seller takes possession back and keeps all the payments made up to the point of default. The buyer gets no refund and has no rights to the property or improvements unless they make all the payments and the deed is transferred.
This puts an enormous amount of power on the side of the seller, as normal forclosure procedures are not needed. The buyer can be evicted as a month to month tenant since they do not have a valid contract after default and no lease agreement in place.
This is a great tool for sellers to use when dealing with people with bad credit, no downpayment or some other problem that would kill a normal mortgage. It costs little to enter into and is quick to get out of if necessary. Paperwork is minimal, but buyer protection is minimal as well.
This was much more common around 35-50 years ago, and has fallen out of favor with most real estate people due to the large risk on the buyer's side. I would not recommend this type of deal unless there is a lot of trust and a very good relationship between the parties. It only works if everyone is honest.
WoW. If you people are just google info please DONT tell is what you found.
It is not Rent-to-Own, that is used with tangible property. You ever noticed you don't sign rental contracts for real estate? You sign Leases...
The term is Lease Option Contract. This means you would be in contract with a lease with option to buy, typically by a predetermined date for a current market value of when the contract was drawn up. The monthly payments go towards a down payment.
The advantage to this is that after a 1-2 years a bank would let you "refinance" into a mortgage when you finish the purchase part of the contract. It is also a nice option for those with bad credit or even speculators looking to flip a property. Most often this is used for large commercial plots. You use the option to pull it off the market, then market the property yourself and try to sell it. You can always walk away later if it doesn't improve value like you hoped. Make sure you keep great records of your canceled checks and never pay with cash.
Be careful with this though, I have a friend who knows a guy who makes a living using Lease Option Contracts to keep peoples deposits and evict them. The laws regarding this can vary from state to state, so make sure you have a real estate attorney look over the contract before signing anything, in this case I don't think a real estate agent is sufficient enough to approve the contract.. A generalized contract from staples or office max, internet etc., probably isn't binding or legal because of state specific laws.
What happens if after 1-2 years you cant obtain financing? Maybe add an extension clause for that. Or the value goes up so much the seller can take back the property or re-negotiate the terms?
The main disadvantage of this is that you can not claim the expenses on your tax returns or take depreciation on the improvement of the property (house). You cant take the full advantage of the tax shelter until your titled and can provide a HUD.
Wow. Good information from all! I really appreciate the help, and would like to hear what anyone with financial or practical experience has to say further.
My situation is that I would like to move back up north but don't know if my intended destination is really the right one for me, yet. The thought was that if I rented, I would have to move twice (ouch) but on the other hand, if things didn't work out with a rent-to-own or lease, I could just quit the deal, consider the payments rent, and look for better surroundings. My credit is super excellent so that is not the problem, nor is the downpayment.
Thanks again.
J
Last edited by JoanD'Arc; 09-14-2008 at 10:33 AM..
Reason: clarification
Wow. Good information from all! I really appreciate the help, and would like to hear what anyone with financial or practical experience has to say further.
My situation is that I would like to move back up north but don't know if my intended destination is really the right one for me, yet. The thought was that if I rented, I would have to move twice (ouch) but on the other hand, if things didn't work out with a rent-to-own or lease, I could just quit the deal, consider the payments rent, and look for better surroundings. My credit is super excellent so that is not the problem, nor is the downpayment.
Thanks again.
J
why are you interested in a lease option if you have a down payment and good credit? Why would you have to move twice? Why would you move there if you don't know why you are moving there? Perhaps you should take a week and go there to see if it is somewhere you want to be.
brokerdave,
I do plan to go "up" there and look around as soon as I can. I just want to explore my options before I have to make a decision. Ok, your questions: If I rent and then buy a house later (my plan that I didn't disclose) that would be two moves. If I moved into someplace that I could buy later, that would solve that problem. I'm getting too old to move too many more times. lol I do know why I'm moving to the state, just not sure about the local areas I would be interested in. Just want to try it out first, after I have done all my homework. If I don't live in NH it will be somewhere in the northeast.
I guess my whole problem is that I have never purchased a house all by myself; it was always with my soon-to-be-ex (who is in the financial business) so I never had to understand all the minutia of the deal. Unfortunately, I wasn't looking far enough ahead to cover a divorce situation. Now I'm playing catchup and have to figure out what the options are. Hope that sheds some light on the situation!!
J
If you go this route, keep your eyes open. I went with a lease option once, and it turned out that the owner wasn't paying the mortgage - he was just pocketing the rent I was paying. I had a friend just suffer from the exact same problem a few months ago.
Not saying you shouldn't, just that you should be careful, and be aware of the potential pitfalls.
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