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How to Find (or Create) a Rent-to-Own Home

August 15, 2019

How To Find (or Create) a Rent-to-own Home
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Do you feel emotionally ready to buy a home, but your lack of capital or credit score has resigned you to renting? There is a middle ground: a rent-to-own home. This arrangement is a godsend to renters who want to build equity in a home without surmounting the hurdles that come with an outright home purchase, which involves saving for a down payment and taking on a mortgage.

So how do you find such a dreamy scenario to go from renting to becoming a homeowner? Read on for the steps to take and pitfalls to avoid when looking for a rent-to-own home.

Pick a place that’s ripe for a rent-to-own arrangement

Finding a property owner agreeable to a rent-to-own scenario might not be easy.

“Probably about 5% of the market is transactions such as this,” says real estate agent RJ Avery of Richardson, TX. And they tend to be in smaller cities or towns—transitional areas, where the real estate market isn’t very desirable or competitive.

In short: You might have to find real estate to rent, and then purchase, in areas that might not have everything you’d like, such as a good school district or great restaurants down the block. But these areas likely offer the best rent-to-own real estate finds. In those areas, a property owner might be eager to just go ahead and lock in a decent purchase price, rather than offer a lease option and work with renters.

Locate a reluctant landlord

Your best bet are property owners who reluctantly backed into becoming landlords—in other words, they tried to sell the home, were unsuccessful, and then began renting it out to tenants instead.

Unlike landlords who own many properties and are committed to raking in rent dollars, these landlords by default often own just one property, and might be eager to get the property off their hands through a rent-to-own agreement. They may also be willing to work with you to come up with a purchase price that works for you in the rent-to-own agreement, which could help you obtain an affordable mortgage.

Additionally, typical rent-to-own agreements specify that repairs and upgrades be made by the tenant (like most terms, of course, this is negotiable), an item that could also sway wavering sellers looking to minimize their obligations as landlords and go with a lease option or rent-to-own agreement.

Know your options

There are numerous elements and potential details in a rent-to-own arrangement, but most of these agreements follow the same basic principles—the potential buyers and sellers agree on the following before signing a lease or entering into a rent-to-own agreement:

  • A time frame to transition from rent to own (anywhere from a few months up to five years) that works for both landlord and buyer
  • The home’s purchase price (either locked in or to be determined by the end of the lease)
  • An option fee—a nonrefundable deposit, paid in addition to rent, but typically credited upon sale to the buyer—to secure the right to purchase the property (Similar to a down payment on a mortgage, this is typically anywhere from 2.5% to 7% of the home’s price.)
  • The home’s rent (Landlords will typically set rent slightly above market; that way, a portion of rent will include equity in the purchase property, typically between 25% to 50% of the total rent.)

Are you ready for a mortgage? Homeownership is a rewarding experience and smart financial move, but home buying is an extensive process and taking on a mortgage brings much more responsibility than renting real estate.

To purchase the home outright, the renter, or buyer, must be approved for a mortgage, which involves a credit score check. The buyer will then be responsible for paying the mortgage each month, just like paying rent, but each mortgage payment takes them one step closer to being a homeowner. Not doing so could harm your credit score and lead to a potential foreclosure.

Assess the risks

There are actually two types of lease options: a lease-purchase and a lease-option.

With a lease-purchase contract, buyers are locked into the purchase by the conclusion of the lease. If you don’t abide by this lease contract, you will forfeit all of the rent you’ve supplied to the landlord over those years, which is essentially your down payment, and could also face legal action over the lease.

Buyers who choose this purchase route should be absolutely clear on their long-term plans and financial outlook. Plenty can happen in a buyer’s life and livelihood that could affect whether he can (and wants to) purchase this house, sign the lease, and handle the mortgage payment.

A lease-option contract is less rigid. In this lease arrangement, buyers can choose whether or not to purchase the home by the end of the lease, and the landlord must honor it. This lease agreement gives you a choice to opt out of the purchase within the agreed-upon time frame, offering a bit more wiggle room if you’re uncertain about the purchase price or whether you want to rent to own the place. But even in this case, you might forfeit your deposit, or down payment, and equity. So before you rent, it’s important to be sure that rent to own is the direction you really want to take to buy the home and that the purchase price is right for you.

Is rent to own right for you? Only you and your landlord can determine that for sure and which lease option will work best for your situation. If you are renting a property you love, need the time to improve your credit score and/or save up the down payment, and have an amenable seller, it might be the right choice.

Still, in most typical rent-to-own cases, “it’s usually better to buy outright—but it is case by case,” says Avery. “Whatever you decide, it’s always best to consult an attorney or licensed real estate broker to be sure you have all the facts.”

The post How to Find (or Create) a Rent-to-Own Home appeared first on Real Estate News & Insights | realtor.com®.

The Most Common Rent-to-Own Scams—and How to Not Get Taken for a Fool

August 3, 2018

Rent to Own Scams

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On the surface, rent-to-own deals can seem like a great idea. If you have shaky credit or lack sufficient financing, a rent-to-own plan can allow you to work toward homeownership.

The premise is simple: You pay monthly rent toward the purchase of the home, and at the end of the set term, you’ll own the property. Sounds perfect, right? But beware: The rent-to-own landscape can be a minefield of scams and deceptions designed to take your money—and leave you in the dust.

Common rent-to-own scams

There are several ways you can be swindled. One of the most common is scammers trying to sell property that they don’t actually own.

“People advertise a house that isn’t theirs, and pretend to be the owners and collect upfront fees from the tenant,” says Martin Orefice, the founder of renttoownlabs.com. To pull off the ruse, scammers find a vacant house that’s for rent and list it online with their own contact info.

“Then they meet the tenant at the home, pretending to be the owner, and ask for an upfront fee or nonrefundable deposit to hold the home,” Orefice says. “Once they collect the money, they disappear.” Shady, right?

Amy Hebert, a consumer education specialist at the Federal Trade Commission, says unsuspecting people can also be scammed by finding out the following:

  • The house is in way rougher shape than they were told (e.g., asbestos or lead is present).
  • The house is being foreclosed on.

 

How to protect yourself from rent-to-own scams

Sure, legitimate rent-to-own opportunities exist—you just have to know what to look for. Here are some simple tips to help you avoid being taken by a rent-to-own scam.

  • Find out who really owns the property. Before turning over any money, ask for documentation showing that the person owns the house—a tax bill, for example. In many cases, the owner information is available online, so you can even check it out yourself. Before you enter into a formal contract, you should also get a title report from a title company. This will ensure that the seller owns the property and can legally sell it to you.
  • Know every detail of your contract. Make sure you understand every detail of any contract before signing. Many rent-to-own contracts allow for stiff penalties if the buyer is late or misses a payment, and some contracts may even become void. That means you forfeit any claim to the property and the money you’ve invested. “Consumers should review—or have an attorney review—the agreement before they sign,” says Frank Dorman of the Office of Public Affairs for the Federal Trade Commission. “It can be very difficult to extricate yourself afterward.”
  • Know what could be wrong with your property. Just as an attorney can help you understand contract wording, a home inspector can help shed light on any potential physical problems and health hazards in your home. Most rent-to-own agreements will include some type of contingency for a professional evaluation. Consider it money well-spent: A professional home inspector can uncover all sorts of needed repairs that are not out in the open. This can give you leverage to negotiate a better price or terms, or even just alert you to possible repairs down the road.

 

What to do if you suspect a scam

If you suspect someone has scammed you—or is attempting to scam you—you should immediately contact your local police department, Orefice says. You can also notify your state’s Consumer Protection Office.

The post The Most Common Rent-to-Own Scams—and How to Not Get Taken for a Fool appeared first on Real Estate News & Insights | realtor.com®.