Rent To Own Homes - Buyer Beware
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.
Home 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
- 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.
- 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.
- 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.
- 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.
- 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.
You will have some good opportunities in rent to own luxury homes in the coming years, as this part of the market is the most glutted and will fall hardest when interest rates rise. You can search all luxury homes for sale, not just the ones that identify as sellers willing to consider creative financing. It is likely that nearly all of them will consider a well-structured creative offer.
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.