Rent To Own Real Estate
Once in a while someone asks me about my thoughts on the concept of rent to own properties. It’s not something I see very often as a Realtor and as a member of the non Realtor public, you may or may not have even heard of it before. Us Realtors can and on occasion do list and sell rent to own properties. Although the specifics of rent to own is not part of a Realtor’s regular routine it is mostly the same logic, advertising, knowledge, and paperwork that we normally do. I’ve even met a couple of Realtors over the years who specialize in it but I don’t think they get a lot of business that way as they seem to have disappeared.
I was recently asked if I had a blog post about rent to own and I answered that no such post existed. I hadn’t written about it because it’s not something people commonly consider and also because it is in the more funky and academic end of the spectrum than what I consider to be useful real estate knowledge for the general public. Anyhow, here is a rundown of what the concept of renting to own in our area is and what my thoughts are on it.
Renting to own a property is pretty much what it sounds like. A contract is made the major points agreed to are that the Buyer pays rent for an agreed upon period of time and then they are given the option to buy the place at an agreed upon price. That price is minus all, most or some of the rent they have paid. Which of those options they choose is a matter of negotiation. The Buyer and Seller agree on a price for the property, they agree how much and how often rent is paid and a date is also agreed upon for giving the Buyers the option to buy the home at the price agreed to minus whatever portion of the rent has gone towards the property. There are of course other dates and clauses that go into the contract that are a little different from your usual purchase of contract and sale but we are doing a brief overview here.
When I am asked whether I think buying or selling a rent to own property is a good idea or not I can’t honestly give them the same answer they were expecting. They are presumably looking a s straight forward answer like “It’s a good idea.” or “It’s a bad idea.” It’s not so much that it’s a good idea or a bad idea, the issue with rent to own is more that it generally doesn’t work out for both parties at the same time. And the thing with making a deal, any deal, is that both parties need to see benefit in it for themselves. It’s practically a law of nature. In other words, getting involved in a rent to own is not a bad, self destructive idea like buying or selling a FSBO or listing your property for a higher price than the market research recommends, but there are a lot of things that can get in the way of it working out.
Let me explain…
One of the reasons it usually doesn’t come together is because the Seller feels that there’s no long term benefit for them because of how possible market changes will affect the outcome. What starts as sounding like a great idea at first becomes worries of having the market value of the property going down and then the Buyers don’t want to buy it when they are given the option to buy because they can get something nicer for the same price. If properties values go up during the rental period then it was a good deal for the Buyer and then the Seller is left thinking that they should have just rented it out conventionally and sold it at a higher price in the end. Having the rent fee higher than the norm for the type of property offsets the risk of this somewhat but it makes it less attractive to Buyers and any estimate of how much creates a good offset is really just a guess, and that guess is just another thing you have to get the Buyer to agree with in addition to the other long list of details.
On the other side of the coin, is the Buyer. If you’re a Buyer and have the opportunity to get a place that works for you price wise as a rent to own I wouldn’t run away from the idea but there are two caveats for you as well:
a) In order to make it worthwhile for the Seller, the buyer will (probably) need to pay more per month than they would for rent on a comparable property. If you don’t end up going through with the sale for whatever reason, then you have wasted a bunch of rent money over the years for no reason. One of the most likely reasons you won’t go through with it and have wasted your money is mentioned next.
b)People generally do rent to own because they can’t qualify for a mortgage but understand the benefit of getting their foot in the door of the market. If you can’t qualify for buying a place just like that right now (especially when rates are the lowest in history like they are at the moment) it’s not a very safe bet to say that you will qualify for a mortgage on the same place in a couple of years even if you have paid off a bit of it. So again, you may end up wasting rent money in the end.
As a Buyer it might make sense to just go talk to a Mortgage Broker and/or a Financial Planner and find out what you need to do in order to get qualified on a mortgage for something, even if it’s for something really basic as it’s rarely worse than paying rent. More on that here.
Those are the main points in my mind. I don’t think rent to own is bad so much as tough to pull off in a way that works for everybody and it’s hard to know who, if anybody, will be a winner when that contract is created as there is a lot of things that can change in the time between creating the contract and seeing it through. A straight up purchase doesn’t span much time and therefore changes in real estate markets, financial markets and personal situations don’t have time to change so much and therefore don’t mess with things. The way I see it, making things more complicated doesn’t usually make them better, but there are exceptions so just bear the above in mind when considering these matters.