Rent to own house in Brooklyn, thoughts?

November 14, 2009 5:35 PM

Rent to own house in Brooklyn, good idea? What are things to look into/watch out for? Would a land trust be a good idea? Some other way for group ownership?

We've been renting a lovely Brownstone in the Bed Stuy neighborhood of Brooklyn for the last 2 and a half years. Last year when asking for a long term extension of the lease we were suprised to hear the landlord wanted to sell the building. While the idea of owning our absolutely lovely brownstone was really appealing, we didn't think it was possible.

He then decided to put off selling it and we signed another year lease, now we just got an email from him offering us a rent to own option. He said that "we would agree on a purchase price and I would credit 100% of your rent ( the normal is 50%) towards your downpayment." It seemed like he was thinking of doing this arrangement for a year.

I've been doing some reading on rent-to-own deals and they seem to be gaining popularity in New York, but this does seem to be a much better than normal deal, we're guessing because he really wants to unload the house even though the housing sales rates are way down in Bed Stuy. What are things we should be aware of before pursuing this deal?

The other kicker is there are six of us living in the house. So I'm interested in ways in New York for group ownership of houses. I've heard about land trusts here in New York but do not know much about them. Are they similar to the "Tenants in Common" ownership in California? Is it possible for the owners to change down the road without have to establish a new mortgage?

I am very well aware of the necessary cautions of going into group ownership with people, and that friends can change when money/ownership comes in the picture. Thats something I will be thinking long and hard about and we'll be having many meetings about. So i'm not really looking so much for advice on that, at least not the "don't trust your friends" type as I already understand what a big deal it is. But if you have ideas on how things can be structured to minimize possible risks that would be appreciated.

So thanks in advance, hope to hear some first hand experiences with either rent to own or group ownership.

posted by lips to work & money (7 comments total)

I'm not implying by posting it that the following story from the Philly Daily News has any bearing on your situation but because I think it's worth reading about how rent to own in cities can go horribly wrong just to inform yourself more generally:

Slumlord Millionairie
posted by The Straightener at 5:43 PM on November 14, 2009

The land trusts I know about are something else entirely. They are pieces of land owned by a non-profit or local government for conservation. My brother-in-law sold his family farm to one in Connecticut so that it would never be developed.

Are you thinking, perhaps, of a land contract? I did one of those in upstate NY, it entailed paying a mortgage and not getting title to the house and land until I'd paid it off. These are dangerous, you could pay for years and have 0 equity. I was buying from a good friend that I trusted and it all went well.

If you and your housemates do decide to go through with this you really really need to consult a lawyer.
posted by mareli at 7:01 PM on November 14, 2009

This is in Washington, not New York, but maybe it will be of help. I used to be a part owner of a collectively owned house. We were officially a non-profit organization, with all of the relevant regulations being followed (an official secretary, treasurer, president; minutes kept at annual meetings; taxes paid; etc.). The organization owned two houses: the one I lived in, with six other people, and another house, with a three-person family in it. We said it was a land trust, and I presume it legally was. If either house was ever to be sold, the money would to go... I forget where, but some charity. No individual could profit from the sale.

Our monthly rent paid for the mortgage, utilities, food, local phone calls, the minor maintenance fund (e.g. a new fridge), and the major maintenance fund (e.g. a new roof). I believe that both mortgages are paid off by now.

I'm not in touch with anyone who lives there now, but probably could track someone down if you have questions. Ooh, look, they have a (neglected?) MySpace page!
posted by The corpse in the library at 7:24 PM on November 14, 2009

You need a lawyer who specializes in tenancy in common. The details of an agreement can allow buying and selling - it's up to you, although mortgages complicate things considerably. I've never heard of a land trust except in the form that mareli describes. The forums at brownstoner and streeteasy are good places to begin looking for attorney recommendations. If the house is a multi-unit property where each party lives in a separate unit in the same house, establishing co-operative ownership may be a possible route. It will be more expensive in terms of attorney and filing fees, but it's a more formal form of property ownership and it's conducive to buying and selling and taking out individual mortgages.

As far as rent to own, I think it's nothing but a gimmick. Basically, for this to be a good deal for your landlord, the sales price your landlord is proposing has to be above market value. He's proposing to credit you a year's rent towards your down-payment because he doesn't think he could find another buyer at his asking price. If I were in your shoes and I wanted to buy the house, I would try to establish the fair market value and offer him that, without the flim-flammery of rent to own. I'd probably low-ball him hard, too - the housing market in Bed-Stuy is terrifying right now, and he sounds more than a little nervous. Quick rule of thumb: multiply your annual rent by 12, and that should be in the vicinity of the purchase price.

Note that obtaining a mortgage as tenants in common is going to be a solid pain in the balls, especially right now, and especially with 6 of you. Also, if you can obtain a mortgage, the bank will probably not count your credited rent via a rent-to-own deal towards any minimum down-payment requirement.
posted by boots at 7:25 PM on November 14, 2009

The Straightener: Ya i saw similar stories, but in our situation is we've already lived in the house for 2.5 years so we know the condition of our house. The deal our landlord seems to be offering would not require us to pay anything extra then we are already paying in rent, so if worst comes to worst and the house gets foreclosed on before we are officially owners, it just means we would have been paying same rent as we have already, so there is nothing lost.

Mareli: Ya we are talking about land trusts, i've heard of people forming a non profit so that they can own a house as a group of folks. I just need to find more info how people have done this.
posted by lips at 7:29 PM on November 14, 2009

Another name for what you describe is a "title holding trust". The major reason for putting real estate in a trust is to avoid probate (e.g. turning over title of the parental home to a trust with the kids as beneficiaries), hold title to property on behalf of an incompetent, avoid Medicaid clawback for nursing home care (needs to be set up at least 5 years in advance), or in some cases to retain privacy regarding the investment. I'm really not clear on the benefits of having a trust hold property as a means of tenancy in common; what you usually want is an LLC/LLP (which can be an NPO in some states; in others the NPO is an S-corp).

Basically, I don't see how it benefits you and it could create complications. A trusteeship is a responsibility on behalf of someone else and thus you couldn't be your own trustee as you would then have a conflict of interest. Who would be the trustee and how would they be bound to serve your interests as tenants? I confess I don't get it.

The usual term for rent-to-buy is land contract. A properly drawn land contract can offer you some protection in the event of default, depending on the circumstances, for instance by using escrow or transferring title. You need a real estate attorney to represent you here.

Anyway, I don't think you need a land trust, but the person to ask is your attorney who knows your state's law.
posted by dhartung at 8:38 PM on November 14, 2009

Consult with a real estate attorney. The best legal vehicle for what you want to achieve is probably a limited liability company, with special provisions for transfer of ownership interests if one person wants to leave, but banks may be hesitant to unwilling to lend to the group under such an ownership structure. Banks like to deal with traditional borrowers. The non-traditional ones seem to scare them.
posted by yclipse at 4:30 AM on November 15, 2009