I get a lot of questions about people “renting to own” or a property, and I wanted to clear up some common misconceptions about rent to own situations.

In my 8 years as a broker, selling well over 300 homes, I have never even once come close to participating in a rent to own scenario. You may also hear this referred to as a rent-to-own, lease-to-own or rental-purchase. This scenario is designed to part a renter/buyer with their money. The basic premise is that someone who cannot afford a property will be able to rent a property, establish equity, and one day be able to buy the property, presumably when their credit improves. They usually pay an “option fee” for the right to buy the property, and a monthly premium on top of rent that reduces the principal. An example:

Tenant/Buyer leases a property from Owner for $2,000 per month, with a $5,000 option fee, with a price of $250,000. The monthly market rent is $1,500 per month and $500 accrues to the principal. This all sounds good in theory, but there are some severe flaws. Lets think about it from the seller perspective:

- They tie up their property.
- If the price goes up, the buyer can exercise the option and buy the property (if they are able), seller gain no advantage.
- If the price level goes down, the buyer can walk away, and the seller has a property that has lost value.
- If the buyer defaults on the rent, or fails to exercise the option, seller keeps the option fee and the monthly premium.

Why would any rational seller want to enter into this agreement? Thus, we can assume that a seller only enters into an agreement if he can get an advantage on buyer – charging a higher rent than market, or a high contract price for the home.

For the buyer, they risk losing the option fee, as well as the monthly premium if they cannot exercise the option. I usually see sellers offering these in lower income areas, where they seek to take advantage of unknowing buyers. My advice: Stay away. Save your money and repair your credit, and buy a home when you are able.

1 Comment

anonymous

This blog is so very helpful. I was thinking about doing a rent to own. I asked the Realty company who is selling the property to ask the owner if I could just rent from them, and their answer was the seller just wants to sell the home and doesn’t live in the property. I then proceeded to view the home and still kind of thinking I may not be to sure about doing a lease to own but I will see what its all about. I get to the house and talk to the seller while the realtor was upstairs and find out that the seller actually still lives in the home. She told me that she was unaware of the high deposit of $6,000 the company was charging customers to move into her house and that she was open to just renting the property and she really just wanted to guarantee payments. I asked her if we cold work something out. She was not allowed to do anything on her own because this company had her in this binding contract and she was older and was scared to do her own sales. They were also renting the property for $1200 monthly when she wanted to only rent for $1000. It really makes me mad when people take advantage of other people. I would have loved to rent her home and payed her rent for her and then if she wanted to sell to me, use could have come up with terms and agreements instead of her being used by a company who would make money on a property they never owned.

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