By Andrew Housser
It's a buyer's market right now in real estate. This is good news if you're in the market for a new home, but bad news if your credit rating prevents you from qualifying for a loan. Yet even if you've had some setbacks, it may still be possible for you to realize your dream of homeownership. The option to rent-to-own or lease a home has risen in popularity over the last several years, in part because it benefits both buyers and sellers. Renting (or leasing) can be a good stepping stone toward home ownership, but before you sign on the dotted line, find out the answers to these all-important questions.
How does rent-to-own work?
As the prospective buyer, you sign a contract agreeing to pay an option fee (generally around $5,000), as well as rent and rent premiums to the home seller. The homeowner will put your rent money toward his mortgage expenses. The extra rent or rent premium goes toward your future purchase of the home. The option fee will become part of your down payment when you buy the house, but the seller can keep this money if you back out of the purchase.
Who should I consult before signing?
Because there's no standard rent-to-own contract and every state has its own regulations, you should talk to an attorney or a real estate agent to ensure you fully understand the financial implications of the contract. This process will also ensure there aren't any problems with the home's title and that it's not in foreclosure. Get a home inspection and appraisal -- just as you would if you were buying the home right now. And talk to a mortgage lender to determine what you need to do to qualify for a loan when your rental option is up.
Is this a good option for me?
Rent-to-own or lease options give you an opportunity to save up a down payment while working to up your credit score. If you were to pay a $400 monthly rent premium on top of a $1,000 monthly rental payment, you'd have $4,800 saved for a home purchase after one year. Add that to your option fee, and you'll have close to $10,000 already saved for your new home. Renting also enables you to try out a home and surrounding neighborhood before buying.
What are some of the cons?
Before entering into a rent-to-own agreement, you and the seller must decide on the purchase price of the home. Most leasing options last for three to five years, and the housing market can change significantly during that time period. As a renter, this can work to your advantage if the market improves and the home's value increases above the agreed-upon contract amount (clearly, that's a negative if you're the seller). Of course, the home could be worth less than the agreed-upon price by the time your contract is up. At this point, you can either try to renegotiate with the seller, go through with the purchase as is, or move out and lose your investments.
What are my rights as a future home buyer?
Until you purchase, you are still a renter and subject to all rules that apply to renters. You can be evicted for failing to make rent payments on time. If that happens, you can also lose your upfront fees and rent premiums. If you still don't qualify for a loan at the end of the rental agreement, you may have to forfeit the extra cash you've invested.
What should I know if I'm the homeowner?
Renting to potential home buyers can be a good decision if your house has been on the market for a while, the housing market in your area is stagnant, or you must relocate quickly for employment or other reasons. The rent income can help cover your mortgage, freeing you to move to your new location. Another upside: Potential buyers are more likely to take good care of your home, since they hope to call it their own someday. But if your renters can't make their payments, you could be liable for two mortgages, a situation that could lead to financial difficulty, and in some cases, foreclosures.
Buying a home may well be the biggest purchasing decision you'll ever make, so it's important to carefully weigh the pros and cons of renting to own. Talk to a real estate expert who can help you determine whether renting-to-own is right for you.
The option to rent-to-own a home has risen in popularity recently, in part because it benefits both buyers and sellers. (©iStockphoto.com/Andy Dean)
Andrew Housser is a co-founder and CEO of Bills.com, a free one-stop online portal where consumers can educate themselves about personal finance issues and compare financial products and services. He also is co-CEO of Freedom Financial Network, LLC providing comprehensive consumer credit advocacy and debt relief services. Housser holds a Master of Business Administration degree from Stanford University and Bachelor of Arts degree from Dartmouth College.
