Rent or Lease to Own Homes – Good Idea or Not?

by on 3.14.11 in Opinion

lease to own homeIs this a good idea?

I get this question all the time and have never really had a discussion about it, until today.

Let me start by saying that i’m not a huge fan.

I want to get that out of the way so that you understand that this article is only my opinion, and I am going to focus on the reasons why I’m not a fan of rent to own or lease to own homes.

What is a Rent to Own, Lease to Own home?

In a nutshell, when you sign a lease or rental agreement, you are committing to pay higher rents on the home for a period of years, at which point you have an option to buy the home at the end of the lease.

The attraction to a home buyer for this arrangement is that the excessive portion of your rent is applied toward the down payment of the home, it’s sort of a forced savings plan.

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5 Reasons I Don’t Like Rent/Lease to Own

1. This scenario is “sold” to folks that cannot qualify for home loan financing right now.  Paying rent to someone under the pretense that you will have the option to buy this home in a few years will DOES NOT help you to qualify for home loan financing.  To me, this is a predatory tactic that preys on people’s desire to own a home when they can’t afford it at this time.

2. Lender guidelines are going to be extremely critical of a lease to own or rent to own down payment arrangement.  The Lender may not accept the down payment source from the seller unless it meets strict verification guidelines.

3. In order for you to “save” money to be applied toward the down payment, you are required to pay higher than market rents – the excess is then applied toward your down payment savings account – make sense?

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4. An “option” means that you pay a premium for the right to buy the home at a future date at terms that are negotiated at the time you sign the lease.  This is a detailed legal agreement that requires that you fully understand the future ramifications of such an agreement.  After the honey moon period ends, and you are now in a 2 to 3 year lease at above market rents, what if you don’t like the neighborhood?  What if you don’t like the house?

5. Finally, what if the seller loses the home?  This is something that I’ve actually seen.  The “seller” is upside down on the home, offers a lease to own, can’t keep up with the payments then loses the home to short sale or foreclosure.

Ok, it was a real struggle to keep this list to only 5 reason why I don’t like rent to own or lease to own homes, I could rant for hours about this topic.

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To wrap this up, here are my final thoughts.

If you are not in a position to buy a home now, do not enter into a higher burden rental situation as a desperation move with hopes of being able to buy a home in the future.

This is a dangerous thought process that I have seen end most often in the owner of the home laughing all the way to the bank because you’re paying higher rent than you should have because you have “dreams” of owning in the future.

Forget all that.  Save your money on your own.  Fix your credit.  When you are able to qualify for a home loan, THEN, and only THEN do you start looking for your dream home.

There are no short cuts.

It goes against logic that by paying more for your rent that it will get you closer to fixing your credit or help you to save more money for a down payment.

I invite anyone with a contradictory argument why lease to own is a good idea to challenge my beliefs here.  I’m not saying I’m right about this, I’m just opinionated :)

 

 

11 comments
Sandyer52
Sandyer52

Need advise scott...

I am looking at a townhouse this weekend...my credit is poor, but I can still afford a downpayment...however, my concern is that there are other fees associated with buying a home...closing costs, inspection,etc...does the inspections also apply to townhouses? although I am purchasing on my own, my 2 older sons work and would be living with me and participating in paying some expenses...what is your thought on this? or would rent to own work for me?

ScottSchang
ScottSchang moderator

@Sandyer52 I think that if you are unsure if you can meet the expenses of owning a home easily, and if your credit is poor, you should wait until you're in a more comfortable position financially to take on that type of obligation.  Not only are there inspections and closing costs, when you own, everything that breaks in the home is your expense.

Try renting in an area that you think you would like to buy in, and see how you like the neighborhood.  In the meantime, work on fixing your credit, save up money for emergencies, and approach buying a home from a position of being empowered, not strapped.

That's my opinion, I hope it helps?

homeowner
homeowner

What about this situation?

The owner has paid off the entire home and is retired living in FL, so the house has been vacant for 1.5 yrs up in MD. A few months ago, I got a much higher paying job (65% increase), but we haven't had time to build savings for a large down payment since I haven't been in the job long enough. We have 4 kids and are in desperate need of a larger home NOW rather than 3 or 4 years from now. We also need stability, so simply renting is not an option. This particular house is PERFECT, and it has gone down in price since it's been vacant all this time. We've looked for homes for years and this area, and we haven't found one we like this much.

We have enough $$ to save up to 20% down payment on top of what we would pay for rent over the next 3 or 4 years - the issue is, I haven't been in my job long enough to qualify for this mortgage, and we certainly haven't had the time to save for the down payment. Might a lease to own work in this situation? Or do you still suggest just wait it out another several years?

Also, when you say you pay more than market rent -- how much more? Suppose the rent is $3500 / month? What would it likely be if it were rent to own? I hadn't realized the rent would be more, which may make all the difference anyway.

Thanks!!

ScottSchang
ScottSchang moderator

@homeowner when you say you haven't been at the job long enough, are you in the same line of work, or same industry?  You should only need a minimum of 3.5% down payment, so that shouldn't be holding you up for too long.

If the owner is willing, maybe just rent the home with an option to buy the home in a year or two.   My concern would only be that you do not pay more than market rents while you're determining if this is really the home you want to own.  It's fairly unusual that a good home would be on the market for so long.

If you do decide to enter into an option - I would hire a home inspector to make sure there isn't anything that you're not seeing that would affect the value, or ability to lend on this home.

You certainly do not want to be in a situation where the property will not qualify for financing in the future.

Hope this helps?

homeowner
homeowner

@ScottSchang @homeowner It's the same line of work and same industry. I just realized I was being way underpaid and found a new job based in an area with a higher standard of living, so it pays quite a bit more. Basically, I don't think the stability of the job is an issue, thankfully :)

I don't really trust the owner since we had discussed renting, but he was expecting us to allow him to keep the home on the market while we rent...is that typical? That last thing I want is to move in, and have him turn around and sell it while we've only been living there 2 months! Or, can we lock him into maybe a 2 year lease without allowing him to sell during that time? I agree - I'd much rather not lease to own, but I was beginning to think that was our only option. If we could sign a two year lease without allowing him to sell the home during that time, I think that would be ideal.

And thank you for the advice to hire a home inspector. I'm not sure we would have done that otherwise.

One other question - with lease to own, you can lock in the buying price - if we were to rent, say 2 years, who's to say he won't take advantage of the situation and then refuse to sell except at a much higher price, one we can't afford? That's just another concern.

Thanks!

ScottSchang
ScottSchang moderator

@homeowner @ScottSchang the terms of your rental agreement would dictate whether or not he can sell the home (with appropriate notice).  I totally understand where you're coming from.

I also just noticed I didn't address and important part of this - paying above market rents.  This is only a concern is the rental agreement states that a portion of your rent will be applied toward the "down payment" on the home.

As a lender, the only way we can use this "down payment" is if you can show that you were paying above market rents, with the difference being applied toward the purchase price of the home.

If you're sure about this home, I think you should probably at least speak to a lender to determine your options.  The job shouldn't be a problem, unless most of your income is from commissions, then it might be a challenge.

Nicole
Nicole

So how do you feel about just renting a home? My fiancee and I currently rent a house, but like you mentioned, we realized we do not like the neighborhood or location. We have 3 dogs and moving back into an apartment is something we would like to avoid at all costs. I don't think we're ready to make the leap into buying a home yet either. What are your thoughts on moving into another rental house?

Rosemarie Reyes
Rosemarie Reyes

My house is going to be auctioned this month. I have been a home owner for 17 years and it seem like "RENTING" at this stage was kinda weird. I was looking into rent-to-own because there's a lot of them to choose from and lot nicer than the regular rentals. Upon reading your article, I am convinced just to rent for now, re-establish my credit and save the extra money for a down payment in the future. Thank you very much!

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