How-to Monday: Rent-to-own
Photo courtesy of Stock.XCHNG
You can rent a house. You can buy a house.
Or you could do both.
Rent-to-own -- a contract that gives a renter the option to buy at a set price -- is a niche part of the housing market. But it's one that more would-be sellers might be pondering as they consider alternatives in these slow times.
Be aware that these deals offer a lot more complications (or, at least, issues to consider) than a straight rental or regular sale would.
You'll want a contract, most likely one written by an attorney, said Barbara Nichols, a California real estate broker who wrote The No Lawsuit Guide to Real Estate Transactions. In it, note the term of the lease option -- how long the renter can rent before he or she is obligated to decide whether to buy -- and the sales price. Normally, an agreed-upon portion of the rental payment is applied toward the down payment.
The renter/buyer should have a property inspection done in advance, she says. You don't want nasty surprises about the roof or the foundation after two years of accruing a down payment on the place.
For everyone's sake, agree in the contract who will be responsible for maintenance and repairs, she says. Note what recourse the landlord has if the renter damages the home and bolts, and what recourse the renter has if the landlord stops paying the mortgage.
Reisterstown attorney Marc Appel suggests both parties decide whether the renter must go through with the purchase once exercising the option or whether it's contingent upon getting financing.
The handful of calls that Baltimore Neighborhoods Inc. gets about rent-to-own issues are from tenants upset that things did not go the way they had been led to expect.
"A lot of times, the lease agreement is not really that clear," said Stephanie D. Cornish, program manager for the nonprofit's tenant-landlord counseling department. There might be just a sentence to the effect of "you have the right to buy."
Appel, a partner with law firm Waldman, Grossfeld, Appel and Baer and a panel attorney for Baltimore Neighborhoods, thinks people should have a lawyer look over the contract before signing.
"Usually it's the landlord who's drafting the agreement, so they've already had it reviewed," he said. "Usually it's the tenant-buyer who has not."
So let's say you have a well-written contract. Is the rent-to-own concept a good idea for you?
"It won't make sense for a seller if the prices are going up, because obviously you're locked into a lower price," Nichols says. "It does make sense for a seller if the prices are going down."
In that sort of market -- namely, this one -- the renter will want to think twice, she says.
Opinions? Personal experiences? Type away.
Comments
I thought that one good reason for the rent to own was to allow someone with damaged credit some time to repair it by making monthly payments. At the end of a specified time frame they can make the purchase at a favorable interest rate with their repaired credit.
Posted by: Donald Wilson | April 14, 2008 4:07 PM
You know, I've heard conflicting information about how useful rent payments are for people trying to repair their credit. One alternative-credit information company, for instance, says it documents and verifies "rental, utility, phone, and other recurring payments that aren't reported to other credit bureaus."
Anyone here know the answer?
Posted by: Jamie Smith Hopkins | April 14, 2008 4:13 PM
Since rental prices are often above sale prices in the city. What good is it to rent-to-own? The same 2 bedroom home in Canton that costs $1800 per month, cost $2000k but has larger tax benefits, essentially $1650ish. Rent to own was popular durin the 18% mortgage rate years, because the owner could offset the damage. If you have decent credit, just buy, you are at the bottom of the market or close.
Posted by: Dunn | April 14, 2008 5:11 PM
Not in real time, huh? Perhaps I could do my job in 60 hours and your in 10?
Keep blocking me. Your are Wonk and "know it all." Don't you live un-Maryland-Columbia and only step foot in the city for work and to type your stats. and re-word assiciated press and USA Today?
What do you know again?
Posted by: Dunn | April 14, 2008 5:26 PM
Christian, for Pete's sake, I have never blocked you, even when you call me names. I'm sorry for the 15-minute delay in getting your first comment up, but I was conducting a phone interview and can only do so much at once.
I don't approve comments while I'm driving, either -- just in case anyone was wondering.
Posted by: Jamie Smith Hopkins | April 14, 2008 5:29 PM
Truely, what do you know about anything? Do you meet with people who are about to be foreclosed on, investors, 1st time buyers, lenders, those with bad credit... on and on? Or do you sit behind your desk and go home to un-Maryland Columbia, knowing you just re-phased the latestet from the some other press?
Hack vs. Wonk?
It only takes an hour to do what you do, my morning between 7:30-8:30.
C'mon Sun, do something!
Posted by: Dunn | April 14, 2008 5:31 PM
This is to Christian,
You are by far the rudest, most disgusting realtor I have come across. I'll be sure to NEVER use your services and recommend likewise to anyone who will listen.
Incidentally, as realtors are not the most admired group as a whole, your being one of the worst is really quite significant.
Posted by: Anon | April 14, 2008 5:40 PM
I was blocked last week!
I can't decide if my blather matters, usually after 4+ beers, or not. But most of what you say seems inaccurate. It kills me, makes me passionate and probably will send me to an early grave.
I will spell check in the future.
The big question is Jamie, do you know the city? You are from Columbia, do you still live there? Columbia has nothing to do with any other place in Maryland other than the DC 'burbs. This is a Baltimore paper.
I bi*ch and know it. I want to stop and not care about this paper, but is pisses me off.
Posted by: Dunn | April 14, 2008 5:41 PM
Jamie's assumptions are incorrect about the rental/ownership spread. While a $400K house does rent for about $1800 vs. the ~$2000 mortgage payment (assuming 10% down on a 30 year fixed at 5.5%), she is ignoring the real estate taxes the homeowner would owe that the renter has already paid as a part of their rent. On a $400K house in the city, the taxes would run approximately $9,600 per year or about $800 per month. This puts the ownership cost at about 36% higher than the rental costs even after your tax savings number is factored in. That all said, I still think you are correct that it is a smart time to buy, just not for the reasons you stated.
Posted by: Ryan | April 14, 2008 5:45 PM
Hi, Ryan -- those rent vs. buy cost calculations weren't mine. You're looking at the comment by Christian Dunn, or at least that's what I'd gather. Thanks for your comment, though.
Christian -- I went back to the comments log and don't see any by you that weren't put up. If you recall what your comment was, post it again. I can only assume that it didn't go through the first time.
Posted by: Jamie Smith Hopkins | April 14, 2008 5:51 PM
Christian - Your whining is tiresome. Your attitude reveals your motivations and it just comes across as deceitful. This is a blog, a mix of facts and OPINIONS. I think JSH does a stellar job!
Ryan - Thanks for pointing out the tax issue, which is huge in the city.
I've been renting in the city for a while now and still find it much cheaper than buying a comparable home in most neighborhoods. Prices have to come down a bit still to be closer to historic ratios to incomes. I think it is likely another year or two before it is a smart time to buy.
Posted by: CD | April 15, 2008 12:30 PM
Mr. Dunn - how did you manage to get through the elementary school?
Posted by: John Williams | April 15, 2008 9:18 PM
I'm seeing more and more peeople interested in rent-to-own possibilities, typically because the buyer has shoddy credit, but the complications involved in making the agreement fair to everyone can easily kill the deal before it gets off the ground. It's a situation where you have to read the fine print carefully!
Posted by: Jonathan Benya | April 17, 2008 10:18 AM