Why is she wanting to do rent to own vs buying?

Rent to own mostly benefits the seller. Her choices will be limited because typically, the only sellers that offer rent to own are homes are homes

that have a hard time selling. In my experience, the people that want rent to own only want it because they dont have the money or the credit to buy right now. Most think that the majority of their rent will go towards their down payment to purchase. This is not the case. Each one is done differently as everything is negotiated and there are no set rules for rent with option. Some, require down payments that will be non refundable if the tenant decides not to purchase. In my opinion, she is better off saving some money, and then purchasing. She will have more options and not be limited to sellers that are offering a rent to own situation.

My sister recently went through this as a seller. She wanted to just straight up sell the house, but it wasn't selling. A buyer approached her and suggested the rent-to-own option, and since my sister was already considering renting it until the local market changed, she decided to go with the rent-to-own plan. Her renter/buyer needed to go that way since they didn't have good enough credit or a large enough down payment to simply buy it.

The buyer was supposed to finalize the purchase in October after renting for about a year (during which time they apparently were late on rent more than once), but "something came up" and they asked to extend the rental period until December. At that time they started getting financing set up, but then in late December the mortgage broker they were dealing with left the company they were working for and moved to a new company taking the paperwork with her. Which set the process back by several weeks, with a closing scheduled for the second week of January, then rescheduled for the third week of January.

The whole time I was skeptical, believing that one thing or another would continue to come up and the renters/buyers would eventually have to be forceably evicted and my sister would discover the house had been stripped/trashed. However I was wrong. The closing occurred about 3 week ago, my sister has the money has been deposited.

Edited to add:

Depending on the local market, even if a place isn't offered as rent-to-own, a seller may be willing to consider an offer of rent-to-own. However in hotter markets the uncertainties involved for the seller may make the plan a non-starter.

Satine, my sister negotiated a rent to own agreement on the house she wanted to buy when she was divorcing. She wanted to wait to buy her first house in her name until all the issues with her ex were settled (and it was a drawn out divorce) but at the same time have a nice base for her two teens in a good school district. It worked out well for her with an understanding seller - and she did buy the house after about a year.

In TX, realtors are not allowed to write rent to own contracts.

The chances of it ending well for her are SLIM. The owner is counting on her not being able to qualify for a loan, and in the meantime they have been collecting above-market rents and get to keep her earnest money.

If she rents - just plain rents - and puts every penny she can save into a savings account for a year (no credit cards, no fast food, no new clothes, no happy hours .. really go totally STINGY for one year) and focuses on paying down and off any debts she'll be in better shape to buy on the open market.

Most people think that on a rent-to-own situation the money they pay in rent goes towards their downpayment. From a Lenders perspective, the only money allowed to go towards the downpayment is any monies paid above a normal local market rent.

They require an appraiser to provide local market rents, and then will calculate anything the potential borrower paid above that amount. Usually, the potential borrower isn't paying any amount above the local market rent. So it rarely works out for the borrower.

You MUST have a REAL ESTATE attorney draft the documents for your own protection. A Realtor is not qualified to do this anyway.

It can work, but I would be very cautious. Most Sellers just want to sell, not hold paper.

It can be a fail for a seller too. We had our house on the market and were late in the selling season. We really didn't want to rent but also knew we might have the house on the market and be paying a double mortgage until spring just because of timing. We had a couple ask us about leasing, sayng they wanted to buy the house but she was finishing medical school and didn't know whether her residency would be here or not. We were suckered by the professional/doctor couple and two young children. Well, we later found out that they knew at the time the were not going to buy the house and would be moving. They didn't really cooperate with viewing the property or showing it, they wanted to apply the deposit to the last month's rent (we said no way) and they did a lot of damage to the new carpet, hardwood floors, landscaping and more. The deposit was nearly enough to cover the repairs -- and they wondered why they didn't get a deposit refund. Sigh. I had to call the cops to remove a contractor working on the repairs and causing more damage and refusing to leave -- getting combative with me and my two young sons. Finished tiling and grouting the floor as well as repairing the hole in the wall myself, then we were on the market at the slowest time of the year again. We got a low offer I didn't want to accept (DH did) form someone we wished we hadn't had to deal with -- a stream of unpleasant people and circumstances all because we were suckered into being nice to a young couple with two young kids (the youngest was a baby).

I'm a little surprised to see all the pro-seller comments, but that may be more true if the seller is offering the lease option. Our tenant got a great house for a great rental rate and caused us a lot of grief. So I wouldn't want to lease to anyone unless the house was intended to be a rental (in which case you don't put in new carpet, have hardwood flooring or have nice landscaping that homeowners would take care of).

20 years ago, we sold a house to people who wanted to rent it for six months before buying, as they would then have available some funds that were currently not available.

We were FSBO (complete mugs really) and I think the buyers were also complete mugs, and the four of us mugs were all sort of happy with the arrangement.

But I would never, ever do that again.

Nothing went wrong, but years afterwards I realised that there could have been a lot of ill-feeling had the market had a giant hiccup up or down. One of the parties would have been left feeling ripped off.

I think the best option for young people wanting their own home is to save like crazy and then buy something very modest.

'... above-market rents...'

Says who?

'The chances of it ending well for her are SLIM. The owner is counting on her not being able to qualify for a loan, and in the meantime they have been collecting above-market rents and get to keep her earnest money.'

Wow.

We didn't do any of that. Gosh, we were mugs.

Really, I think that the whole scheme, like others have said, is filled with many, many things that can go wrong (for buyer AND seller). I'm not in the slightest surprised that REAs won't touch them.

'Most people think that on a rent-to-own situation the money they pay in rent goes towards their downpayment. From a Lenders perspective, the only money allowed to go towards the downpayment is any monies paid above a normal local market rent.'

Yes, Pamghatten, that's what we did. The buyers paid us the going rate of rent. I don't even remember that there was any money put down as a deposit. It was the most hopeless contract ever and its just so lucky that the market didn't move in that six months.

Most people think that on a rent-to-own situation the money they pay in rent goes towards their downpayment. From a Lenders perspective, the only money allowed to go towards the downpayment is any monies paid above a normal local market rent.

I would like to see a source on this, we sold two houses as rent to own homes (both to long time tenants) and the bank didn't care at all about the amount of rent the tenants had paid.

The only problem with rent to own is the fact that there is no standard. There are thousands of variations on a rent to own contract and while they can be good for both parties, they often are not. Any time there are people struggling there will be other people willing to take advantage of them. For every good rent to own agreement there are 20 bad.

My daughter is looking into this possibility because she has bad credit and no down payment money. Most of her debt is medical and honestly don't know how she will ever pay it. She has struggled for several years with addiction but has been clean for more than4 years. She has her own apartment and is working full time and going to college. In those four years she has paid rent and has never been late. I agree that most rent to own renters have bad credit and it just seems that it gets harder and harder to get out of that situation. She works as a waitress and pays school, utilities, rent, insurance, car maintenance and honestly there is nothing left to save I am old school and am suspicious of anything not "normal" so wanted some input. Thanks for all the info Don't know what she'll decide but I hope rent to own isn't it.

bry, maybe I misinterpretted what this paragraph means:

Most people think that on a rent-to-own situation the money they pay in rent goes towards their downpayment. From a Lenders perspective, the only money allowed to go towards the downpayment is any monies paid above a normal local market rent.

In a different situation to the one I spoke of above, my mother had her mother's house let to a man who was a friend of the real estate agency of that town. My mother received a letter from this agent requesting that her tenant Fred Upstart [not his real name] rent to buy this property. From what I remember, the agent was trying to organise a plan where his friend would own the house after renting it. In other words, give him the house.

For the sake of clarity, I feel that rent to own means the paying of rent would NOT make any difference to the agreed on price of the property. Until the money has landed in the seller's lap (or preferably, their bank) the house is (to all intents and purposes) merely being rented.

Since there are lenders that will do mortgages with 500 credit scores, or 580 fha with 3.5 percent down, I'd say she probably needs to save enough to have that dn pmt and 6 mo of pmts in reserve. 580 is a pretty low score. If she is below that with no savings, she probably should not buy now anyways. The home would most likely get foreclosed on. At least renting she won't make her credit worse.

Bry911... I believe the post is referring to the fact that if sellers do collect more rent from the tenant that is above the market rate, some contracts are written that the monies that are above and beyond the market rent will be put into escrow, and if this is the case, (the seller offering money back so the buyer can use towards a down payment), then these monies will have to be verified by the lender.

For sellers... remember to legally and ethically treat the person as a tenant for the term of the tenancy. They need to be reminded that they are tenants until the deal closes as a sale. Too many of these renters go into a rent to own situation and then customize the home to their tastes w/o the owner knowing it. There should also be two separate contracts... one being a lease agreement for the tenancy, and an Offer To Purchase Real Property for the sale part of it. Just think of the sales agreement as one with a very delayed closing date.

Inspections and all due diligence is best performed up front, even before the lease agreement is signed. And, the sales price needs to be agreed upon up front too. And any wording as to what the consequences are for a tanking economy during the lease agreement term.

Really, I don't understand, from a renters view point, why they would want to trap themselves into a purchase of one particular home, when during the lease term they are renters if they sign a Purchase Agreement or not. Why not just wait until your lease is close to being over, and THEN making the decision that this is the right property for you.

I remember this type of "Lease with Optional To Buy" in the early 80s, a realtor suggested us to use it when we were shopping for our first house.

It was explained to us that as the renter/buyer we could try out first, and had longer time to identify pros/cons of the house. In addition, we could lock in the low price before economy turned around. In retrospect, the interest rate was so high (in 18% -20% range), may be it was one way for the realtor to sell a house. We did not use it, instead of taking direct purchase route.

bry911 .. you can google the FNMA Selling Guide, section B3-4.3-12 Rent Credit for Option to Purchase. Not that all lenders follow FNMA/FHLMC guidelines, but they are the industry standard.

A lease with a bargain purchase option is one of the more common methods. You can also work around the cash downpayment requirement.

In these cases the lessee handles the maintenance and can update and modify the property to increase the fair value. You have a clause in the contract to pay for major repairs (if the lessor (owner) pays then the repairs adust the BPO.

These deals usually require portfolio loans rather than FNMA loans

If it were my daughter, I'd advise her to finish school, get the better paying job, and then look into buying a house. She'll be much more financially stable by then, and will be able to handle the costs and responsibiltiies of home ownership. No need to rush into it.

And old debts can be settled for large discounts, especially medical debts. Hook her up with the Dave Ramsey plan, that might help.

My Realtor DM bought two SFH's during her career. She 'sold' one on a rent-to-own basis. She did make some profit, despite origination in a very down RE market with a long lease. This is a risk for the owner as well as the person renting to own. Had the market increased as in the recent 'boom', my DM would have lost a lot of money. (I really think she did this deal to help a single mother with two kids have a decent place to live. She can't have made much on the house.)

Bry, I would never advise a seller to hand over the maintenance, repairs, improvements of their home until the renter has legally become the home owner. Most of these agreements never go to a closing table, so why treat the renter like the homeowner?

Like I said before, make certain the renter understands that they are a renter until and only if it goes to closing. Which is why you need two separate contracts... one would be the Lease Agreement and the other a delayed Offer To Purchase.

Bry911, I'd have to agree with narealestateguy.

I've seen owner finance deals have the buyer responsible forvrepairs, but usually it is with 30 percent down with 9-11 percent interesr. In that case, you have enough cash up front from the buyer that they usually will make pmts so they don't lose it, and if you do have to foreclose on them, you've made enough to pay for repairs.

Installment contracts are different than leases.

Getting rid of maintenance is one of the biggest draws for slum lords and one of the reason there are so many crooked people offering rent to own deals. They take a property in poor repair offer it at rent higher than they could get in good condition. They charge the lessee for the repairs they do until the BPO disappears.

Edit: The problem with separate rental and purchase agreements with the owner retaining maintenance expenses are that the owner is on the hook for maintenance during the rental period. A savvy renter could easily get upgraded electric, HVAC and plumbing systems during the rental period with no sales price adjustment. Those big depreciable upgrades like HVAC, electric, plumbing, and roof are replaced with a long term payback in mind. Even smaller repairs are often approved with the, "let's find the problem and fix it now so we don't have this happen again," mentality. Without any of those maintenance costs pushed out to the buyer then both parties are compromised by those decisions.