Buying A Rent To Own Home

Know Your Seller

Choosing a Rent To Own Home involves researching your seller’s reasons for offering their home on a Rent To Own or Lease purchase basis. As a tenant/buyer you may be reluctant to ask for information about your seller. Don’t make this mistake!

You have as much reason to check out your potential landlord/seller as they do you. Asking you seller a series of questions at the outset can save you a lot of grief later on.When looking for a Rent To Own home you will probably be dealing with one of the following three categories of sellers:

• Individuals
• Real Estate Investors
• Builders/Developers

 

Individuals

Individuals often offer their homes for sale on a Rent To Own basis after they have attempted unsuccessfully to sell it on a standard basis. Today’s buyer’s market has made Rent To Own homes much more popular. People sometimes find themselves in a situation that they need to sell within a certain time frame or have some cash flow relief. There are a number of valid circumstances in which this can occur including:

• Move Due To Job Change
• Purchased Another Home and Now Have Two Payments
• Health Conditions, Death, or Disability
• Under Contract To Purchase Another Home
• Inability to Afford Rising Payments

Don’t be afraid to ask your seller why they are offering the home for sale on a Rent To Own basis. When dealing with individuals you should be on guard for the individual that is asking more than market price for their home. With declining values in some areas and the recent popularity of 100% loans many people have found that they are so “upside down” in their homes that they cannot sell them and break even. Knowing the underlying financing and liability of the home you are purchasing on a Rent To Own basis can give you a good indication if the home will qualify as a feasible option for you as a buyer.

You can have a realtor do area comparables for a rough idea of the market value of the home you are considering or you can pay for an appraisal before you commit yourself to purchase the home. A CMA (Comparative Market Analysis) from a realtor can be done in a minimal amount of time and usually at no cost. An appraisal can cost into the hundreds of dollars.

Being aware of your home value up front can save you thousands down the road. If the home you are considering is selling for market value you also need to consider the trend in the area. Are home prices increasing or declining? You should try to adjust your sales price at the option date to reflect the area market value. No matter how much you like the home, no bank is going to lend you over the appraised value on it.

Always Verify Your Seller’s Financial Condition

Be assured that they are going to ask about yours. Your seller should have acceptable credit and mortgage payment history or a good reason why they do not. In a standard sale situation your seller’s financial condition does not matter. If you seller’s title is clear, you use proper closing procedures, and you pay for the property, it is yours. With a Rent To Own or Lease/Purchase situation you may have a one to three year period in which your seller’s financial condition may affect your transaction.

No matter what type of seller you are dealing with you should always check to make sure that the property has no liens, judgments, or encumbrances that would prevent a sale at the option time. A title company can do this for you. Make sure you are talking to the actual owner. It may sound silly but you should always verify that the person you are dealing with actually owns the home. There have been cases that involved renters and other non-owners offering to sell a Rent To Own home that they do not own.

Real Estate Investors

You may want to begin by asking this question when dealing with a real estate
investor:

Have you sold this home on a Rent To Own basis before?

If the answer is yes this may indicate that they sell homes to unqualified candidates on a regular basis and depend on the seller to default in order to gain their Option Fee.

A positive response does not always mean that this is the case. If they indicate that they have sold the home on a Rent To Own basis that did not work out then you may want to ask them what happened. There are many legitimate reasons for a Rent To Own sale not to go as planned. Make sure you are satisfied with theirs before you go any further. If you are dealing with an investor that sells their homes regularly on a Rent To Own basis ask them for references. In addition be wary of the Real Estate Investor that asks for more than the standard 3-5% Option Fee. Remember that this fee is lost if your sale does not take place.

Builders

If you are dealing with a builder you should verify that your home is not part of a package construction loan that covers more than one property. You can also verify in writing with the builder’s lender that your home will be separated from that package.Entire subdivisions have been sold on a Rent To Own basis and all of the tenant/buyers have been required to move due to builder foreclosure.

Make sure that any builder or developer that you deal with is solvent and the home that you are lease purchasing is not part of a package loan. If you are purchasing a home from a builder make certain that it is completed. If it is not completed make sure that you have the terms of completion are in writing.

Also remember that just because a home is new does not mean that it will appraise for it’s asking price. Have a realtor give you a comparative market analysis (CMA) on the home or pay for an appraisal before you commit. Regardless of which type of seller you are dealing with there are common pitfalls to avoid when purchasing a home on a Rent To Own basis.

Negotiating Your Terms

While you can offer the owner of any property the option to purchase it with a Rent To Own agreement, certain prospects are better than others. Individuals, investors, and builders are using lease purchase agreements more and more to sell homes that they otherwise could not move. Homes that are already for sale on this basis are much easier to Rent To Own than those that are not.

There are times when the owner of a home has not been able to sell the home and has already purchased another or is paying a payment on an empty property. These situations are often the best prospect for a Rent TO Own arrangement.

If you find a home in the area that you are looking in that has been for sale for over six months and is also vacant you may want to contact the owner to see if they have considered a Rent To Own or Lease Purchase agreement, If you are approaching the seller be candid about your situation whether it is a credit issue, coming up with a down-payment, or whatever your circumstances may be. Let them know that you are interested in purchasing the home but that you would have to have a short lease period before you could purchase the home outright.

Chances are that if the home is not already for sale on a rent to own basis that they have not considered this option. Give them a general idea of your terms and ask then to get back to you but let them know that you intend to purchase a home within the next week or two.

Make several contacts such as this and wait for their call. Chances are within two weeks you will have several prospects for your new home. The more contacts that you make the better your chances are to find a home that you want on your terms.

Negotiating a Rent To Own home agreement can be a challenging process. You should be familiar with the terminology, provisions and common pitfalls of lease purchase and option to purchase agreements. Although you can do this yourself it is always best to seek the advice of a real estate professional and/or attorney when dealing with your agreement.