What can you tell me about rent-to-own lease options?
July 31, 2018 2:34 PM   Subscribe

Experiences, wisdom, words of caution all welcome. More inside.

My spouse and I are looking for a rental residence in a specific neighborhood which I need to live in for work, while we also save for a house purchase. We saw a house we really loved, but felt the rent was too high for us while we're saving for a house. When we declined, the realtor suggested the owners might be open to a rent to own offer. She suggested a proposal of about 20% of the rent going into escrow to create a down payment transferable to an ownership agreement in 24 months.

I've done a little looking around online but want to get a better sense of what this kind of agreement is like - including pitfalls - before going forward. Wouldn't we actually need to negotiate the final purchase price first, so the owner can't just raise the asking price by the amount we already contributed? I have a vague idea how to find a fair price but have never made a house offer.

We're good candidates for a mortgage but have never had one and aren't pre-approved. I don't have a lawyer to go to so we'd probably need that help as well. This whole thing was spurred just because the house we were looking at checked a whole lot of our boxes and it was hard to say no to, because we have been wanting to save for a house. This would allow us to save for the house while, well, living in the house we're saving for. What do I need to know about before we consider doing this? Is this just all too much and the wrong way to go about it? Thank you!!
posted by Miko to Work & Money (6 answers total) 2 users marked this as a favorite
I would not think about this too hard if the realtor is just spitballing. Does the realtor know that the owners are open to something like this? Generally, a seller is going to prefer cash up front rather than arrangement like this - so it would be a little surprising if a typical residential seller was game for something like this. You would definitely need a lawyer. The main thing that could go wrong is that you lose the money you are paying into escrow because, for example, you are late on payments, or some other contractual breach. The legal terms of the arrangement (i.e., who gets to take the money out of escrow and under what circumstances) are something that absolutely requires a lawyer. I would think that you would need to pre-negotiate the purchase price or some mechanism to calculate the purchase price (i.e., an index or something) or else you aren't really getting anything for putting your 20% into escrow.
posted by Mid at 4:36 PM on July 31, 2018

It takes just a few hours to get approved for a mortgage. Have you (if you're in the US) looked into FHA mortgages? They only require 3.5 % down, and they're low interest. Here's one link that's not from a specific bank.

Rent to own can be really dangerous. You don't own the house until you've paid it off so you run the risk of losing it all if it doesn't work out. Horror stories abound.
posted by mareli at 6:15 PM on July 31, 2018 [2 favorites]

They are a higher risk for you as there is a much longer term where if anything goes wrong, you may forfeit a large portion of your deposit. It's much better to use an existing home loan, and have proper financing if you are looking to purchase.
posted by nickggully at 6:28 PM on July 31, 2018 [3 favorites]

One key thing to get is a Contract for Deed -- it's the official legal document that gets filed with the county, and generally has a much better ability to defend if things go wrong. If you've just got an agreement on paper that the landlord came up with, you might be accepting a bum deal. Make sure everything is legal and filed with the local jurisdiction in charge of such things.

Also, and this is more anecdotal: contract-for-deed properties can be nice for less-than-standard buyers, but the properties are often also less-than-standard; if it was a great property, why wouldn't someone who can just go get a home loan not have already bought it, if the seller wants to sell? One case in point: a couple years ago we tried buying a home through normal channels, and found that there's a property line encroachment with the business next door. Lately, this house is advertised weekly on local Facebook housing groups as a contract-for-deed house, because apparently the owner can't get anyone to buy it through normal routes. It's preying on people who are more desperate to buy a home that they're willing to sign things without giving the same due diligence (title search, home inspectors, surveying boundaries, etc.) that they would if they bought the house with a mortgage, because all those things are expensive. I think they surveyor was $600 on his own when we tried, and the loan company/bank we were working for ate that cost, but if we were trying to circumvent having a bank involved we'd probably have been reluctant to shell out that kind of money when everything "looked fine".

But, you never know -- Contracts for Deed exist because they work, otherwise they'd either have been abandoned or made illegal a long time ago. Just do the same diligence you'd need done if buying a house with a mortgage: it's a lot of work and expensive, but you still need to do all the work the bank would do on your behalf to make sure it's a property worth investing in, and be ready to walk away if the deal doesn't look sound before you sign.
posted by AzraelBrown at 7:00 PM on July 31, 2018 [3 favorites]

I've never heard about any of these working out right. What I do hear/read is the owner sells; and all your time and money leave with them. How does that happen? Bankruptcy; fraud, trusts; many legal ways for your investment with the owner; towards Your future; to be gone with any poor actions by the owner.
There are reasons why these ~lease/rent to own things aren't common. Great idea; horrible implementation.
posted by Afghan Stan at 5:33 AM on August 1, 2018 [1 favorite]

You can actually buy a house with 0% down (there's usually some closing fees, but they are all rolled into the total mortgage). When this happens, you pay about $50 a month extra in what's called "renter's insurance". You can probably afford a mortgage now if you wanted!
posted by bbqturtle at 10:39 AM on August 1, 2018 [1 favorite]

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