Rent-to Own transactions consist of a tenant who cannot purchase a home at the time they enter into the lease for one reason or another and a seller who does not need to sell the home immediately, but still wants to sell. So the tenant/buyer decides they will rent the home until their situation changes where they can buy the home. But how does this actually turn out?
In order to start a rent-to-own transaction, you have to find a seller who wants to sell their home, but is able to wait to do so. Over 75% of the properties that go up for sale, need to be sold. It is rare that a seller can wait for that sale to occur. Of the sellers that can wait but want to sell, there is typically a reason that the house is not selling. Either the condition is poor, location is poor, or the price is too high. So instead of taking care of the issues needed to sell the home now, they find a way to increase their revenue over time and decide to rent the property.
So a potential rent-to-own tenant/buyer approaches said seller and agrees to rent the home until their situation changes where they can buy the home. The tenant/buyer agrees to a future sale price, or an option to buy the home in the future. Either way, the tenant/buyer agrees to pay an upfront option fee, a monthly rental fee PLUS a monthly option fee that goes into an escrow account monthly. For instance, an option fee of $5000, monthly rent of $1500 and an additional $500 per month where the $5000 and $500/month go towards the purchase price.
But here is what happens 95% of the time. The option period expires, the buyer/tenant still is not in a position to buy for whatever reason, and the $5000 and $500 per month is forfeited to the seller. Now the buyer is out a ton of money, and they are back to looking for a home to live in.
On the other hand, the seller made approximately $11,000 more than if they had sold it, the tenant/buyer has treated the home as if it was their own so the seller spent little on repairs and maintenance, and they can now use that money to afford to sell the property for what they wanted in the first place. Even if the tenant/buyer is able to execute the option to purchase the home, the sale price is typically 5-10% higher than market value. Either way, the seller wins!
I don’t like to say never as I am sure there has been a few instances where things work out, but, over 21 years and real estate and I personally have yet to witness the tenant/buyer experiencing a good outcome.
My advice? First, find out what it is exactly that is holding you back from buying now. Credit issues? Get working on them. Income issues? Wait for them to straighten out. The last thing you want is to enter into something not knowing if you can afford it yet or not. So what should you do? Just rent. If you cannot purchase now, just rent somewhere. No options, no additional fees that you could lose. Just pay the rent, make sure you can document it, and suck it up. Even in extreme cases, there is no reason that you cannot fix your situation in under 3 years. Most credit only issues we can clear up in less than 6 months. So get in touch with me to get a free credit report and home buying plan. In the mean time, check out some rental properties available below or click here to search our database of homes for rent