Rent with Option to Buy

30 08 2010

I don’t know how many times I’ve heard this question in the last few months.

What about rent/lease with option?

Unfortunately with the way the economy has been the last few years most people can not afford or get pre-approved to buy a home. So they think the next best thing – rent with option. Wrong! I go over it so often that I decided to put if out there and then start directing people here to read about it.

What you think when you hear “Rent with Option”

Rent to own. You go to your local rental shop, sign a few paper and walk away with a big screen tv. Make regular monthly payments and in 12 months you own it.

It must work the same way with a house right. I’m renting it, so I sign the lease and state I want to buy it in a few years, because I have rent with option my monthly payments must go toward purchasing it instead of going to the owner like any regular rental payment does. Wrong!

What “Rent with Option” really means

Renting with option is a purchase agreement. Not only do you sign the lease agreement but you also sign a Lease with Option to purchase agreement and a Residential Sales Contract.

The lease is just like any other lease: you agree to maintain the property, pay the rent, live there with out disturbance, ect.

The Residential Sales Contract is just like any other: you agree on an amount, a settlement date, terms of tittle, ect.

In the Lease with option you agree to the purchase period i.e. how long until you actually buy the house. You agree to an option consideration or “Option Fee” i.e. an addition non-refundable dollar amount placed on top of your regular monthly payment (usually a few hundred). This will be held by the owner and credited to the buyer at time of purchase for down payment or closing costs. You agree to the Purchase price, regardless of the property value at time of purchase. So if the market drops (gee when has that happened) the value of the house will no longer be what you agreed to pay for it. Lastly you agree to obtain financing before the end of the lease with option term.

In the end there is considerable risk to renting with option and in the long run it would be smarter to take the extra three hundred a month you would have spent on option and put it in an interest baring account and save it up on your own. You can purchase a home that you haven’t warn and torn on for the last few years and is selling for current market value .

I hope this has helped. Feel free to add your thoughts and any additional feedback.

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2 responses

31 08 2010
Jeff Belonger - The FHA Expert

Liz,

For the most part, you highlight some important insight on why the “rent with option to buy” could be a bad thing. I would agree with a lot of it… especially about the up keep of the property and such. And people should just rush in this if they can’t buy now, thinking it will be easy in the near future. Not with mortgage guidelines changing and where interest rates could be in the near future. Besides, you brought up the point about values possibly dropping and you are stuck with that value. Now… the one thing that could help that borrower is the fact that an appraisal has to be done prior to closing on the property. And this could be the buyers out if both parties can’t come to an agreement after the fact.

One thing that I do want to point out.. this can be a good thing for those borrowers that are in the process of working on their qualifications in buying a house… and that they love the house and that the house is vacant. I have a buyer right now, who I spoke to on July 20th. I told them that it would take about 3 months to restore their credit and at that time, we should be able to close. The house is also vacant and the sellers did say that they could rent it back from them for the next 2 months, until the close. No, I did tell all involved, even the listing agent, that there is no guarantee… but these are serious borrowers… they started the 2nd day after I spoke to them, in fixing their credit. I got them in touch with someone that I trust and have been dealing with for 3 years, that does credit repair. It’s been 35 days and his credit scores have gone up from 10 to 15 points… needing only 18 more points… and her scores have gone up 22 to 37 more points… and that she needs about 30 more points… but from what they were told and what needs to be done, they did it now… we are just waiting for the next wave of things to hit, which should be in the next 20 to 30 days, and we should be on track to close by October 28th.

Anyhoo… sorry for the long comment… again, you did make some excellent points, but I wanted to give you my professional opinion on this topic, that I have been in this business since 1992.

Thanks,
jeff

1 09 2010
Liz Benitez

I wanted to thank you for your comment Jeff. Any feedback is great. Most of the rent with options questions I am fielding lately have not been with serious buyers but people who want to purchase several years down the line. It sounds like your buyers are looking to purchase the house with in the next 3-6 months. A lot of the concerns I pointed out will be negated, although the market is changing quickly it isn’t changing that quickly and hopefully the value of the house will be somewhat similar when they buy.
Again thanks for the feedback, good luck with your sale.

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