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Monday, March 10, 2008

Rent to own or lease with option

Many people who are in need of a place to live while they recover from some misfortune (many times a foreclosure) are turning to rent to own or lease with option scenarios. Here what that means.

A seller agrees to rent a property to an interested buyer for a set period of time, usually one to three years. At the end of the lease, the buyer has the option to purchase the home at a preset price. Many times the Realtor for the Lister will insist that the buyer sign a Purchase Agreement (PA) at the front end of the lease. That PA establishes the fixed price for the property and establishes that there was an intent to purchase at the beginning. It still does not lock the purchaser in to eh purchase at the end of the lease. It really is an option.

A portion of the monthly rent paid during the lease is usually counted toward the down payment. To cover that, the seller charges a rent increment or monthly premium of $200 to $300 compared to comparable rentals. In most states the seller is expected to keep and accumulate this money in a separate account and not to co-mingle it with other moneys from the lease (such as the security deposit) or with personal money.

Many owners also charge an option fee for taking the property off the market, usually 1 percent to 2 percent of the sale price. This may be applied toward the purchase. This is an optional practice.

Sellers have no guarantee that renters will buy at the end of the term, but if they don’t, they keep the option fee and the amount of the rent that would have gone toward the down payment. The renter walks away without any further obligation but loses all of the money that was being collected towards the purchase down payment.

This can be a good deal for both sides; but, in the end, if the option is not exercised, both sides can also view it as a loss. The renter sees "his money" that has been collected during the lease being kept by the owners and the owner see the loss of the opportunity to sell the place and perhaps a loss in value, if the renters caused any damages. The seller is further at risk for a loss if he is forced to evict a bad renter, since that can take months to accomplish.

So, is this a good idea? In this market it might be the only way for a seller to realize some value from a property and get some relief from his mortgage payments. The key will be to take the time up front to do the due diligence work to check out the renter ahead of time, to make sure that you don't get a deadbeat. For the renter there are few downsides. The loss of the small uplift amount that the seller may be charging is likely inconsequential and the lack of obligation at the end takes away most of the risk. If the renter really does like the place, and ends up buying it, at least some of what he/she paid in rent went towards the purchase - try getting anything back from an apartment.

I suppose you could also go to RAC (Rent-A-Center) and get all of your furniture, to Enterprise and rent your car and maybe Rent-a-Wife (yes there is such a thing - go to and then you'd be all set. Of course, maybe you'll need to visit too for man's best friend. Is there no end to the convenience of rentals?

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