Wednesday, April 21, 2010

The Pros and Cons Of Rent To Own

The Pros and Cons Of Rent To Own

By Gil Gross - Real Estate Today Radio · April 16, 2010

In last week’s post we talked about credit recovery and how a rent-to-own agreement may be an option while you work towards getting your credit back on track.

So, we thought this week we would expand on the rent-to-own scenario and talk about the pros and cons of entering into such an agreement. Keep in mind, entering into any rent-to-own agreement will require the services of a lawyer and a contract that is agreeable to both parties.

For Buyers

Let’s weigh some of the pros and cons from the buyer’s perspective. Looking at a rent-to-own agreement objectively will give you a better feel for what you can expect and perhaps how to avoid some of the pitfalls that can be associated with a rent-own-scenario.

First and foremost, rent-to-own gives you the benefit of building a down payment towards the home you are currently renting. Financially, this is a great benefit to you, the renter, as you now are building a nest egg towards the eventual purchase of the home. Your agreement may require that you pay higher than market value rent but the extra will come back to you when it comes time to purchase the home.

An additional benefit is that you are able to “test drive” the home, the neighborhood and what it would be like to own a home in the area. This is a benefit that a regular home buyer does not have.

However, there are some things to be aware of when entering into a rent-to-own agreement.

Probably the number one concern with any home buyer is price and this is where having an agreed upon written agreement is most important. Locking into a price early on can be a double-edged sword. If you agree on a price now, and then the home’s value goes up? The landlord might not want to sell to you. But if he does, you’ll be getting a great deal.

If the price falls, you are not going to want to pay more than the house is worth. In addition, your financial institution will not provide you with a mortgage on a home that you are paying too much for. You are better off to agree to a professional appraisal down the road, when you are ready to buy.

Lastly, keep in mind that you will still need to qualify for a mortgage when you decide to buy the home.

For Sellers

In the rent-to-own scenario the seller’s pros definitely outweigh the cons.

In today’s tough real estate market a rent-to-own agreement may be able to attract buyers you might otherwise not get.

One of the key benefits to such an agreement is your renters now have a vested interest in the property and it is in their best interest to take care of the home they are currently renting.

Additionally, if the renter decides not to buy at the end of the lease you will have still earned significantly higher rent during the tenancy.

There are very few scenarios where the seller would lose in signing a rent-to-own agreement with a current tenant other than locking into a price early on in the agreement and selling the home below market value. However, this could easily be avoided by not determining a price on the home and agreeing to a professional appraisal down the road, when the tenant is ready to buy.

How To Make It Work

As a buyer or seller it is imperative that you speak to a REALTOR® and your attorney to insure the contract is fair for both sides.

Buyers will need to approach their mortgage lender and be sure they will qualify for financing when the time comes. Remember, if you cannot qualify for the mortgage at the time of purchase it is more than likely any money amassed towards the down payment will be lost.

Make sure that the agreement covers maintenance and repairs as these are common points of contention, for both the buyer and seller, in rent-to-own scenarios.

Whether you are buying or selling, a rent-to-own agreement can be a creative solution in a tough real estate market. Just remember, consult an attorney before you step into any agreement.

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