Renting but with option to buy


October 12, 2007|By ILYCE GLINK

What do you do if you want to buy a home but don't have the cash for a down payment or the credit score to qualify?

You might try to find a "rent-to-own" situation in which you can lease the property and purchase an option to buy it when you're ready.

When the real estate market was steaming along and sellers had buyers lining up out the door, renters found themselves out of luck.

If a seller can sell a property and get rid of it, why play landlord? It's better to have the buyer's cash in hand and move on. That's why rent-to-own properties were more difficult to find in the last six to seven years.

But now that the real estate market has soured, hundreds of thousands of sellers are desperately searching for buyers. Being a landlord isn't the typical seller's first choice, but rent-to-own situations can help a seller turn a renter into a buyer.

Here's how a rent-to-own situation typically works: The renter/buyer agrees to rent the property for a certain period of time. An option to purchase the property at a specific price is agreed upon, and a nonrefundable option fee is paid. Sometimes this fee is credited toward the down payment.

In addition, a portion of the rent paid is also often credited toward the down payment. At the end of the lease term, the renter/buyer decides whether to buy the property or pay another option fee and continue renting the property.

Sellers might like a rent-to-own situation if they've had trouble finding a buyer for their property, and if they can get enough rent to carry the property without losing any money.

Often, a renter/buyer will be more motivated to pay the rent and take better care of the property if he or she is seriously considering buying the property at the end of the lease.

If you're a first-time buyer looking for a rent-to-own situation, here are some issues you might want to consider:

Companies advertising rent-to-own properties might not be what they seem. If you search Google, Yahoo or your local Craigslist for local rent-to-own options, thousands of listings will come up. But if you click through, you'll see that many are developers looking to unload property. Or they're Web sites that claim to help you find the rent-to-own house of your dreams. Except that once you sign up, nothing happens.

Check out the "houses for rent" and "houses to buy" section of your local newspaper or Web site. Sellers might not know whether they'll attract a tenant/buyer if they advertise their property for rent or sale. As a result, they might advertise in both sections.

FSBO sites

You should also look at some of the more popular for sale by owner (FSBO) Web sites for sellers who appear open to a rent-to-own or lease/option deal.

Ask for what you want. A seller might not want to be a landlord, but local market conditions or his personal finances could force him to rent because he can't sell. As a tenant/buyer, you can ask the seller to fix up items in the house, repaint and replace or clean the carpet if needed.

Take the time to explore the neighborhood before you sign on. If you're serious about buying a home, you'll need to seriously think about the neighborhood.

That means making sure you're in a good school district and in an area with plenty of shopping, services and restaurants nearby. Is there public transportation and good access? Who is on the streets during the day and evening. Though you're renting, the goal is to turn you into a homebuyer.

Negotiate the rent credit and pickup price before you sign the lease/option agreement.

Put it in writing

If the landlord/owner has promised to credit a portion of the rent and the entire option fee toward your down payment, get it in writing. You'll want to know what percentage of the rent will be credited and whether that credit will earn interest. Do the numbers before you agree to anything.

If the reason you're renting instead of buying is that you don't have enough cash for a down payment, be sure to negotiate for a sufficient rent credit so that you have enough for a 5 percent to 10 percent down payment if you pick up the option to buy the property.

Rent-to-own and lease/options are legal transactions. Before you sign, be sure you talk to a local real estate agent who can help you figure out if the price is right (you don't want to overpay if you buy it down the line). You'll also want to have an attorney review your documents to make sure you're protected. Like any purchase agreement (which is what a lease/option is), you'll want the right to cancel the deal for certain reasons.

Contact Ilyce Glink through her Web site,, by mail at Real Estate Matters Syndicate, P.O. Box 366, Glencoe, IL 60022 or by calling her radio show at 800-972-8255 from 11 a.m. to noon Sundays.

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