Rent to Own – Dos and Don’ts

The first thing you need to understand when you are looking at a ‘rent to own’ or ‘lease to own’ is that the landlord is probably looking at you in the same manner a wild beast carefully studies its prey. Does that mean you should not take on a ‘rent to own’? It could, but not necessarily. A ‘rent or lease to own’ can be a good deal in the right situation and circumstances. Here are a couple things you should consider and prepare for.

 

First, you need to protect yourself as much as you can in regard to the value and price of the house. Often, landlords will put a ‘rent to own’ price on a house that is not fair market value because they can get away with it. They know you are in a bind and they don’t anticipate you will do your homework. You would like to buy, but most likely your credit is holding you back or some other credit related issue like a judgment that you cannot payoff in full or a recent bankruptcy or a divorce that ruined your credit. Whatever it is, don’t fall for this. If you cannot get the house at a fair price, there is no point in continuing with that landlord. So how do you figure out a fair price without spending a bunch of money on a ‘full’ market appraisal of the house? There are a couple things you can do:

1. Look at the ‘county value’ of the home.
2. Use the county’s real estate appraisal web site to find other ‘similar’ houses that have sold in the neighborhood. The key word here is similar: same/close square footage, same bedroom count, same bathroom count, similar age, similar amenities, and similar garage.
3. Call a local appraiser and ask them if they could/would give you an opinion of value for a reduced fee. Since you have already seen the house, you can give them your best assessment of the condition and the amenities. The appraiser can look up the house on the county real estate website to get a good idea of the size of the house and should be able to give you a decent idea of the value of the house without actually looking at the house. They might charge you $100/$150 for this instead of $350/$450 for a full appraisal. You might have to call a couple appraisers to get a deal like this, but it will be worth your time if you need a more professional opinion.
4. You can look on realtor.com or other real estate sales websites for similar houses and see what kind of price tags these homes have. If the one you are considering is $10,000 or $20,000 more than the majority of these houses, you should probably walk away unless the landlord will be reasonable and lower his price. You should not expect to get a bargain, but you should do everything you can to get a fair price. Remember, you are probably not in a position to get a bargain, but you will be better off renting than paying too much for a house. A fair price would be the market value or less.

 

Second, you need to be careful with your down payment and your monthly payments. Often a landlord will try to get you to put down a large down payment. This is reasonable for them because if you walk away, they stand to gain more. This is their safety net. However, if you put down a large down payment, they may want to find reasons to make you forfeit your down payment and they might write that in their contract, which you should read carefully!! For you, the best thing is to put down as little as possible. Often, a landlord will still have their own mortgage on the property which will not allow them to ‘actually’ sell you the house because it would be a breach of their mortgage. Therefore, even though you have a contract with them, their mortgage will supersede your contract. If the landlord does not have a mortgage on the house they are selling you, try to get the landlord to file the contract and file a mortgage. Most likely, they will not want to do this because it is a lot of extra paperwork and work on their part. There are also some additional costs to do this. If you have the money to pay these costs, it could be in your best interest to pay them and this is not out of the ordinary. If you were getting a mortgage through a lender, you would have these costs. Getting the contract and a mortgage filed will protect your interest in the property. A local title company can help you with this.

When you make your payments, make sure you DO NOT pay cash as there is no way to create a paper trail with cash. A paper trail will protect you. You should pay with a personal check every month. Obviously, you don’t want to bounce any checks as this could be grounds for termination of the contract/mortgage if the landlord writes up the contract in that manner and they might. Remember, they are trying to protect themselves in any way they can and they are trying to make money. You should respect that, but don’t fall prey to it because you are uninformed or unprotected. When you pay with a personal check every month, you have a paper trail that your bank can verify with the cancelled checks. This is extremely important when the time comes for you to get permanent financing on the house.  Also, make sure the landlord is putting a portion of your monthly payment toward the principle balance you owe them for the house. You will have to negotiate this with them. Get as much as you can!

 

Lastly, whether or not you buy a ‘rent to own’ property, if you really want to buy in the future, but your credit is holding you back, you should get started repairing your credit right away. Before you approach a credit repair company, you should undertake this task on your own. You might still need to go to a credit repair company, but the effort you make on your own can improve your credit score enough so that you either don’t have to use a credit repair company or the fee you will be charged by a credit repair company will be greatly reduced because you will have already cleaned up a lot doing basic credit repair. You can find instruction and free credit repair instructions and kits on the web. CreditBlossom.com is a good place to start.