What is Rent-To-Own?
If you’re having trouble finding a house to buy, or even getting a mortgage, you might be wondering if “rent-to-own” is a good option. Rent-to-own, or lease-purchase, is where a tenant agrees to lease a home and eventually purchase it from their landlord. Usually, the tenant pays a large down payment at the beginning of the agreement. The tenant makes monthly payments, a portion of which are often applied towards the purchase price. They continue making payments until eventually they “buy out” their landlord by getting a mortgage. While that might sound promising, tenant buyers virtually never end up with the house. There are many reasons for this. Let’s discuss…
Common Downsides
Rent-to-own deals almost never work out for the tenant / buyer, because the terms usually favor the landlord.
Unlike a regular lease, the rent-to-own tenant / buyer is usually responsible for repairs and maintenance.
Also, the monthly payment is usually higher than market rent. This is because a portion of the monthly payment typically goes towards the purchase price. The bad news is that rent-to-own agreements usually have an expiration date by which the tenant must pay off the remaining balance (usually by getting a mortgage). If they don’t complete the purchase in time, all the extra money they’ve paid each month and the deposit are typically forfeited. Why?
One main reasons someone does a rent-to-own deal in the first place is because they can’t qualify for a mortgage. The assumption is they’ll work to improve their credit before the deadline. However, if that deadline arrives and the tenant isn’t in the position to get a mortgage, their hands are often tied.
Another thing with rent-to-own purchases, there is usually no up-front appraisal, so tenants can unknowingly agree to pay more than the house is worth. That means even if they are able to qualify for a mortgage, the bank might not be willing to lend enough to pay off the landlord.
When that happens, the house does back to the landlord, who keeps all the money the tenant has already paid. This is a pretty common occurrence, but there are other risks. Here’s a real-life example of a disastrous Rent-to-Own / For Sale By Owner purchase (these were not my clients):
A Rent-to-Own Disaster
A husband & wife couple signed a rent-to-own contract with their landlord. They assumed that meant they had “purchased” the home, However, as is common with rent-to-own, the property stayed in their landlord’s name. They consistently paid on time, every month and handled all the repairs & maintenance. This went on for over 10 years. All the while, the property was still in the landlord’s name.
At some point, the landlord re-married. His new wife then took out a mortgage on the property. Keep in mind, with rent-to-own, the “buyers” are technically still tenants. There has been NO legal transfer of ownership. And even though these folks had been making payments for over 10 years, they were still just tenants, not owners. They had no idea this new wife had taken out a mortgage on the house.
At some point these “buyers” decided they wanted to sell “their house” and buy another one. They quickly figured out that would be much more difficult than they expected.
After taking out that mortgage, the landlord’s new wife went to prison and the landlord died! At this point, the landlord’s son stepped in to settle the estate, and quickly realized he had a mess on his hands. These poor “buyers” weren’t going anywhere for a while, because all of this had to be settled in court.
Luckily, there was enough money in the estate to pay off the mortgage. After over a year of delays and legal expenses, these buyers where able to prove they had equity in the house. The down side was that they had to basically put their lives on hold. They surely spent many days in court without knowing when (or if) their situation would be resolved.
I can almost guarantee this would have never happened had they simply worked with a good real estate agent instead of going at it alone. So, is rent-to-own a good idea?
Thinking of buying, selling or investing in real estate? Feel free to reach me below.
Justin Rollheiser – REALTOR®
Keller Williams Realty | Diamond Partners, Inc.
13671 S Mur-Len Rd | Olathe, KS 66062
Mobile 913-800-7653
Office 913-322-5878
Comments or Questions?