Rent To Own Homes - Buyer Beware

Posted by Joe Manausa on Tuesday, October 26th, 2010 at 11:38am.

Rent To Own Homes - Home buyers need to understand some risks of buying a home through a lease purchase agreement, and how they can mitigate these risks.

If you are a regular reader reader of the Tallahassee Real Estate Blog, then you know that I am an advocate of using a lease purchase agreement (rent to own homes) and many other forms of creative financing for real estate.

But just because that I advocate the use of this form for real estate acquisition does not mean that one can use it without careful due diligence.

Free list of homes available for home buyers with bad creditHome buyers need to understand some risks of buying "rent to own homes" through a lease purchase agreement, and how they can mitigate these risks. Just last night I received a comment from a reader who recently found this out. KC wrote:

Here is our situation, we moved to the Tallahassee Real Estate Market from out of State. We signed a lease purchase agreement on a 4 bedroom 2 bath home for three years. That way we could get established here in Florida and make sure that it was the right move for us. We love it here!!! We received a letter from the owner of the property three days ago that due to the economy they are filing for bankruptcy and that the property was already in a foreclosure.

We were shocked beyond belief. We are looking for a new home as we have pets that are like our children so we can’t do the rental thing and we don’t want to live in a house that we can’t buy. We basically have lost all the money we have invested in this home as some of the lease payment went toward the price of the house and we paid a big down payment.... -KC

As you can see, "KC" got into a bad situation and lost her investment. This is a risk in any rent to own program, so my recommendation is to follow some basic safety tips to avoid this happening to you.

Rent To Own Homes - Buyer Checklist

  1. Work with a highly experienced real estate broker - Yes, this is self-serving, but most real estate agents and real estate brokers charge the same fee (and it is paid by the seller). Work with somebody who knows the area, knows the people, and has a ton of experience. Don't put yourself at risk by being some agent's first "rent to own home" transaction.
  2. Require the property owner (seller) to provide evidence that the mortgage  is current. This could be done by reviewing the monthly mortgage account statement as it would contain the recent payment history. Review this to observe a timely payment pattern.
  3. Require a monthly "proof of payment" from the seller. This could be as simple as a copy of the check sent to the lender, but it should be something that keeps the buyer (tenant) informed as to the status of the existing loan.
  4. Require that the sales deposit remain in escrow until settlement or termination. If this money is tendered to the property owner at occupation, it will be lost in the case of a default (just as it was for "KC"). This is a negotiable point that a buyer may have to concede in order to get the property owner to agree to the overall rent to own agreement.
  5. Review the list of rent to own homes with your broker and try to select more than one to purchase. If you have the luxury of offering on more than one home, you most likely will be less tempted to be strong-armed by a seller.

Ultimately, you cannot protect against the devious property owner who plans a strategic default, but you can do a good job of safeguarding against working with this type of seller. Follow the tips above (specifically the one about working with a highly knowledgeable real estate broker), and you should find yourself living in a great rent to own home.

 

Joe Manausa, MBA is a 26 year veteran of real estate brokerage in Tallahassee, Florida and has owned and managed his own company since 1992. He is a daily blogger with content that focuses on real estate analytics and providing his clients with a tactical advantage in today's challenging market.

1 Response to "Rent To Own Homes - Buyer Beware"

Mahopac Real Estate Guy wrote: As you can see, rent to own is a great option. You can rent out your house right now, usually covering all you monthly expenses with the rent you collect. You beat the recession by locking in a higher sale price in the future. How can you go wrong? If you want to know more about rent to own issues, then I invite you to read an article from putnam real estate broker.

Posted on Thursday, November 11th, 2010 at 10:07am.

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