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Rent to Own?
We have all seen the signs or newspaper advertisements. "Rent to Own!". My first reaction is always "Why?".
There may be a situation or two where such an agreement makes sense. However, beware. And remember to keep asking yourself (as Buyer or Seller) --- "Why am I doing this?"
First, let's look at some Seller's pros and cons:
- Pros: You have someone interested in the house who wants to purchase it at a later date
- Cons: The person interested in the house cannot purchase right now. Red Flag!
- Cons: The person interested in the house cannot purchase right now. Red Flag!
Yes, I said it twice.
Well, you say. What about the Buyer? Surely there must be an advantage to "rent to own".
- Pros: You may have an opportunity to "lock in" a house until you are able to actually purchase via a mortgage or cash.
- Cons: Read the fine print in your agreement. A Seller would have little incentive to offer you a "rent to own" deal.
In particular, one problem I see is that the buyer will most likely need cash for a down payment when they move forward with the purchase. If their rent is going towards the sale price, this does little to help the situation on settlement day.
What's the solution?
For the Buyer ---- talk to a local Realtor and Lender. You'll be able to determine a fair market value for the home and also how much money you will need on settlement day, what your monthly payments will be, etc .... Ask your Realtor, Attorney, and Lender to review any "Rent to Own" agreement.
For the Seller ---- Ask the Buyer for a written explanation of how they will be able to purchase the home at a later date. Preferably, this should come from their lender. Perhaps they are acquiring money from some sort of legal settlement. Ask for proof of that. In other words, be cautious. Also, ask a local Realtor to help you determine the fair market value of your home.
And finally for both Buyer and Seller, another big risk is market value over time. What will the market be like in 18 months? No one knows. If the market changes a considerable amount either way, this could be big trouble.
If the market goes in decline, it will affect the appraisal value and could potentially nullify a loan commitment. For the Seller, what if the market improves? Was this really the best you could do?
Bottom line is if you minimize risks, both the Buyer and Seller should have a much better chance of doing what the goal is. Transferring the home ownership from Seller to Buyer.