Rent-To-Buy and Lease-Option Programs for Buyers
I spoke this afternoon with a Buyer interested in homes available on Rent-To-Buy, also called Lease-Option, terms. I’ve received several inquiries in the last month or so about these options and want to share some of the pitfalls of these programs.
The first - and major - pitfall is that while everyone knows how renting a house works, and many know how buying a home works, there is no standard definition of Rent-To-Buy or Lease-Optioning a home. In practicality, the program works however the landlord/owner says it does - and unless they are offering the program professionally, it’s a very good bet that they don’t know how the program should work either.
And don’t think their real estate agent knows how to structure the terms, either. There are a handful of landlords - myself included - who offer homes on this basis, but few - if any - use a real estate agent in those transactions. Consequently, agents have little experience or knowledge in this area.
In a Rent-To-Buy contract there can be several components present - or not. Option Money is frequently required of the Buyer as a demonstration of good faith and intent to buy. I’ve seen programs that require as little as $1,000 and I’ve seen programs that require as much as $15,000 (!) Sometimes those funds are creditted back to the Buyer when they purchase the home, sometimes they are not. In no circumstances is that money returned to the Buyer if they decide not to buy the home.
There can also be Applied Rent, or a portion of the monthly rent creditted back to the Buyer when they purchase the home. Once again, Applied Rent may be offered - or not - depending upon the Landlord/Owner’s desires. In no circumstances is that money returned to the Buyer, either, if they decide not to buy the home.
Determining the Purchase Price of the home also varies - some programs set the purchase price at today’s market and hold that price ‘fixed’ for a set period of time. Other programs build in a price escalator and some say ‘we’ll figure out the price when you’re ready to buy’ - to my mind, the least desirable of the options from a Buyer’s perspective.
Buyers may be asked to sign a Rental Agreement and separate document specifying the purchase terms. If the separate document is an Option to Purchase, it may be preferable to have that document publically recorded - a good time to note that paying for the advice of well-versed Real Estate Attorney is very important in a Rent-To-Buy or Lease-Option agreement.
Last, a Buyer is committing - up front - to purchase a home based upon very few options. A recent search of my primary area on our local Multiple Listing Service shows 2,947 homes available of which 50 are willing to consider a Rent-To-Buy program. The purchase prices of those 50 homes ranged from $68,000 for a mobile home to $650,000. Ten homes were available in the $100-199,000 price range. So a Rent-To-Buy client is committing to purchase their home chosing from perhaps 2 or 3 homes that fall into their price range across a 5-town area.
In contrast, when that Buyer has repaired any credit issues and has saved up a downpayment, they can choose the best ‘fit’ from any of the thousands of homes for sale. The same Buyer looking in the $100-$199,000 price range would now have 794 homes from which to choose.
Last, the Buyer has little negotiating leverage in a Rent-To-Buy program for precisely the same reason - there aren’t many options. They are forced to take the rent, the terms and the price that the landlord/owner offers - in contrast, Buyers have a great deal of leverage in negotiating purchase terms because Sellers know that the Buyer has many alternatives available.
My advice to renters seeking Rent-To-Buy or Lease-Option programs is to do a ‘normal’ rental, repair their credit and save until they are ready to buy a home. It’s sometimes not the message they want to hear, but it’s safer, smarter and the better long-term decision in most cases.
9.30.2010