Renting to Own...Can Hidden Dangers Derail Your Dream?

Lola, while we haven't seen a huge number of lease options here in my market, people are reaching the point where they are trying to be creative. Most owners here though don't like the option idea because they are hopeful prices will be higher in a year. They are opting for straight leases in the meantime.  In any event, renters, buyers.....due diligence is extremely important!

We are seeing more of these to the north, too, Lola.  I read of one instance where the buyers had paid $10,000 down on a Lease-to-purchase, and the sellers were foreclosed on.

Colleen,  Until last month, our foreclosure numbers seemed to have stablized and then increased significantly.  It's hard to predict where things are going. 

Hi Colleen, our home prices have been trending downward in most areas.  It sounds like you have a more robust market in your area.  Leasing has become attractive for a number of reasons including some buyers wanting to wait to see where the market goes before purchasing.

Lynn, What you have described in your comment is really painful for the buyer who lost a fairly large investment.  It's somewhat unnerving to think that you could be renting a home which was going into a default position and loose everything.

Great, great information for these type of purchasers out there Lola.  I like how you highlighted the point about the risk of the home being in foreclosure while being rented.  Lease options can be very risky.

Great thoughts lots of pitfalls to think of when you get involved in one of these it is more difficult than it looks.

Lola - Thanks for these tips. I have a client who is considering a lease option and I can see now why a title search make sense.

Lola - These are all very legitimate concerns.  In this type of transaction there needs to be caution exercised by all parties concerned.

The Buyer so as not to be assuming the seller's obligations and ...

The Seller so as not to be relying on a conclusion that has no chance of happening.

But ours is a tricky market nowadays.

Lola great tips for the Buyer - and then there the whole series of tips for the Seller in that situation!  Very helpful!

Great subject for a blog................I worry about these "rent to own" properties.  For both buyer and seller.  There are a lot of risks on both sides.  However with this market, it is something that I feel will become more common!  I just refered out one, as I do not feel qualified to protect my buyer at this time...........but will need to learn and educate myself as I will get more and more inquiries.

Lola,

Thanks for the post. I don't get much traffic for this option. However, going forward, I will refer to these salient pointers you have referenced here. Thanks. Bookmarked!

I am seeing very few of these, the buyers don't want to offer in today's prices because they think prices are going to come down further. The sellers don't want to do it as they think the prices will come up. Just by opinion of what I'm seeing over here.

Lola, this article is informative and timely.  Thank you.  I'm asked quite often about lease options from potential buyers who can't at this time obtain a conventional or FHA mortgage.   I am very leery of them and try to go over the pitfalls to them.

One thing I highly recommend to any buyer is to retain an attorney to oversee every part of the transaction.

Also make sure that all payments are made through an escrow account so it is your lender on the property you are buying that is gettign the funds and not another property the seller owns

Lola, you mentioned a GREAT danger to a renter, whether a straight renter or lease to own, is how secure is that underlying mortgage? If the homeowner defaults, the tenant gets the boot too. Very good point along with your others.

Lola,

I personally don't think rent to own theory can work most of the time with the market changing daily downward unless you put in some sort of range...it's worthless by the time the tenant is ready. We have one right now we offered the option and they never signed it....good thing because I told my partners the renter/buyer would never qualify and now they can't and they never signed the option and they are now 3 months behind in rent let a lone they have been late every single month...we even reduced the rent for the next year to help them and they still are late and have bounced numerous checks. Go figure.

Lola...great points! What you are witnessing is the dawn of a new era; with the economy the way that it is, you are probably going to see a lot more buyers who have gone thru foreclosure or other credit problems utilize the Rent-To-Own approach while they attempt to rebuild their credit score...and like anything "new' their are hidden risks and dangers that can be avoided..if you have someone like Lola on your team!

I appreciate you! 

Patricia, it's a very heart breaking call to get from a buyer who thought they had a place to stay, only to be informed that their rent was being pocketed and the mortgage not paid.  Another situation which sometimes occurs is if an additional mortgage is placed on the home and goes into default. 

Terry, very true.  Many folks think that renting to own is simply about filling out the lease paperwork.  There are many things that we need to keep in mind when assisting our clients.

Lola ...as I scroll down the featured blogs I saw your pic and OMG you look just like Michelle Obama !!! Hope it doesnt offend you.  :)

Jennifer, Thanks for your comment.  Talking with Keith Jarrett was very helpful.  Pulling a title commitment for a rental property is not something that comes to mind for many agents and members of the general public.  In today's climate, that's a shift in thinking which is prudent given the irregularities which we are seeing in many different areas of the market.

Carol...your point about caution for both Sellers & Buyers is appropriate. In this post, I only focused on buyers, but Sellers also have to be aware of issues which may affect them.  Doing a credit check on the potential buyer is one precaution.  However, sometimes even our best efforts fall short and things don't work out as well as we would hope. 

Liz, this would be a great blog to write.  If you do...I'll promise to link it up here too. :)  Thanks for stopping by to read and leave a comment.

Michelle, just a few years ago, you could not search the Grand Rapids MLS for rentals only.  Today, in a reflection of the current market, there are many homes that are available for people to rent or to rent and purchase.  This is one of the reasons I think that we need to discuss the issues that people need to be aware of.  For many residential real estate agents, this is unfamiliar territory. 

Our commercial agents do it all the time & it might be helpful to talk with them about some of the issues they consider when putting together lease options.  You were probably wise to refer out a transaction that you felt would not represent the clients' best interest.

William, thanks for stopping by.  Leases were not common in the residential market in our area either.  However, with the market challenges that we have faced, more people are considering this option.

Missy, thanks so much for sharing what is happening in the Ann Arbor market.  This is what I love about Active Rain!  Are you finding this caution about spending money on a home with regards to buying too or just lease with an option to purchase? 

There is real concern about falling home values and many buyers are making very conservative offers...aka Low Ball offers.   After several months of our foreclosure/short sale numbers remaining pretty stable, we had a spike in September of almost 10% (from the average of the past 5 months.) 

James...I appreciate your insight, but how would a buyer set this up?  They don't own the home yet, the seller is the principle.  In addition, they would not be recieving the payment stubs for the underlying loan if it exits, or any paperwork from the bank about a potential default.  Is this something that you have been able to set up for your clients?  I'd love to hear more...

Gary, security of the underlying mortgage is a real concern with the marked increase in loan defaults.  Unfortunately, this can change at anytime.  Potential renters need to be aware that this can be a risk.  Do you think that we may ever have the scenario in which as a part of the transaction, BUYERS request a copy of the payment history on the home they would like to rent?  What are your thoughts...

Neal, thanks for adding some excellent insights to this post.  You mention 2 important issues.  First...will the VALUE be there when the option is exercised if the market continues to trend downwards? 

Buyers need to think about this and perhaps consider allowing an insertion in the contract which enables the option to be exercised in a way that reflects the market conditions in play at the time...perhaps a new appraisal.  If the market goes up, this would obviously work to the seller's advantage, but it would have the benefit of more fairness. 

Then there's the issue of non-payment from defaulting buyers who are now in a property which the owner is still responsible for.  Doing a credit check can help, but even that is not fool proof.  There are a lot of things to consider as a home buyer and home seller.

Bobby...thank you for your kind comment.

Fernando...LOL, prior to this election cycle NO ONE had ever said that.  Now, I'm stopped in stores sometimes.  My husband disagrees...he thinks I look like Lola and bear no resemblance to Michelle. I find it somewhat humorous. Thanks for stopping by to read this post.

Great post, as always it important to do your homework. If it sounds too good to be true, it probably is. It's important to make sure that you are dealing with legitimate companies and people who know what they are doing and have a proven track record. It is definitely a case of buyer and/or renter beware.

Absolutely Bonita!  Most people are simply unaware of some of the underlying issues which can impact ownership. 

All good points, Lola - I have friends in PA right now who have been renting a house for over 6 months now and found out that the owner hasn't been paying the mortgage with their rent payments and now the house is going into foreclosure.  Luckily, the bank says it will work with my friends to buy the house before putting it on the market or going to auction.  But it's just bad all around.

Don't like them.  Never did like them.  Never will like them. 

We sold a home 3 weeks ago to a buyer who was planning on a lease option but he said after reading my blog about them, he changed his mind and decided to just buy.

Lola - Rent-to-Owns are becoming more popular these days.  Thanks for the tips!  :)

Hello,

My name is James Waslker I'm a agent in Texas - I'm newbie to this site. I was wondering how long you beena memeber and what do you think of this.

Hi Lola- I, too,  get more inquiries than before about rent-to-own and lease-to-own.  Even understanding the needs and circumstances that fuel the desire to do this, I am wary of offering encouragementbecause of the apparent high rate of failure for buyers. Thanks for addressing another topic that is timely.

These are very real dangers.  You can make payments for a long time and find out the owner has not made his payment!  It is happening now.

Hi Lola, Your post is one of the most informative and useful blogs I've yet to read on activerain.  Thanks for the information and your blog!

Very timely advice, Lola.  I'm in the process of negotiating a lease to own right now and it's definitely a different transaction - but since we've dealt with these before, that certainly helps. 

Christine, thank you for sharing your experience.  Sometimes banks will work with the renters in these types of situation.  Many home buyers will just move out without thinking about exploring this option.  It can be cheaper for the bank than foreclosing on the owner. Definitely something that people should consider or talk with an attorney to understand their rights and options.

Lenn...I agree with you.  If there's any way one can do a sale, it is preferable.  Sometimes the homeowner chooses this as a way of avoiding pricing their home to sell.  I've often wondered if it may be less expensive to simply sell at a lower price and be rid of the hassle.  From a buyer's perspective, it has the potential to leave you in a very vulnerable position if the seller fails to live up to his obligation.  A lot to think about.  Appreciate your stopping by...

Deb, you're welcome.  It's interesting to read the response to this issue from around the country.

Hi James, Welcome to Active Rain.  It's a great place to learn and grow professionally.  Thank you for taking the time to visit and read my blog post. 

Eloise...thanks for your comment.  I wish there were some statistics which could show us the trend regarding the failures or success on these sort of transactions.  I am now aware of any.  If you have a link or any information, please post it here.  It would be very helpful. 

Sometimes home buyers choose this option because they cannot qualify for a loan and are considered a poor risk.  In that case, one would assume that the default rate would be higher.  But, with the tightening of the credit markets, many more people may have to consider this option...folks who would have easily qualified for conventional mortgages with the old standards.  These individuals would likely have pretty good credit histories when it comes to their rental payment.  Definitely worth exploring...

Barbara...Unfortunately it is.

Jake, Thanks for taking the time to stop by and for your kind comment.

Ed...Lease to own options are never easy to negotiate.  There are so many things to think about.  I think that it is helpful to share some of the things that we need to consider as we weigh this option with our clients (buyers and sellers)  Lease with options can be a good solution for some people, but they are certainly not for everybody.  The tightening of mortgage lending guidelines may actually be a protection for some buyers who were stuck with what essentially became abandoned second homes.  Thanks for your comment.

Creative investors have been buying and selling houses for years, either using the Lease Option or Subject To methods.

For example if you are concered about the payments being made use a Loan Servicing Company (LSC) that is Licensed and Bonded.  The buyer makes the payments directly to the LSC, they in turn make the payments to the mortgage company.  Most LCS's are online where you can log in and receive a status report of when the buyer made the payment.

The LSC's handle late notices and even evictions should the occasion arise.  Point being do not let the seller collect the payments from the buyer.  This also helps when the time comes for the buyer to re-finance as there is a record of how they made their payments.  If they made them on time this goes along with with a mortgage lender.

Been there done that 500 times for my sellers and buyers, so I know it works.

Lolu - Congratulations on the feature.

Respectfully (you know I'm a fan of yours), I am not a big fan of Lease with an option to purchase - especially for residential buyers. Perhaps it is my own experience, but based on what I know, renters typically dont end up buying. People's taste change over a period of 3-4 years and it happens to real estate as well. Especially in a situation of a lease (if the "down" was not large), tenants typically walk away from them.

Betsy, Thank you for your comment.  For many residential real estate agents, leasing is not something they are familiar with.  Prior to the past couple of  years, my experience with leasing was gleaned through some commercial transactions which I was involved with.  Our local boards do not have lease forms in the Grand Rapids area, so many agents are struggling to find the best resources.  Although this post was geared towards buyers, the suggestion of a Loan Servicing Company is very helpful.  Thanks again!

Loreena, Thanks for stopping by.  I've enjoyed reading several of your blogs too!  You make a good point. A real estate broker usually will not allow a buyer to move into a property they are purchasing until they have paid for it.  One of the reasons for this is that when you don't have an investment in something, it's much easier to walk away from it. 

This probably also applies to the lease with option to purchase too as the incentive to move forward may be undermined by a low investment.  In this regard, a land contract with a sizeable down payment is preferrable if it is possible.

Lola ... thanks for this nice post about Renting to Own and Lease with option.  Best wishes. Harrison

Lola "Rent with Option to Buy" sounds better than it really is.  In my opinion the Buyer's would be better off getting the Seller to just agree to "Truly" pay a certain preset amount towards Closing Costs, especially if they plan to purchase withing a couple of years.

Here for about $250. you can get an attorney to draw up a great rent to own contract that protects everyone. I wouldn't have it any other way and I get paid up front.

I didn't read all of the comments so not sure if this was addressed already.  I had been in the mortgage side for many years and many people thought that all of the money they were paying or even a large portion of the money they were paying in rent was being applied to the down payment.  Not so, a lender will evaluate typical rents for the area and anything paid over and above that can/may be considered part of down payment.  So no matter what agreement you might have, legal or otherwise, lending restrictions may prevent what sounds to good to be true, is in fact not true.  Just something else to keep in mind.

It is important to do due diligence as you have suggested.  I also always recommend that the parties are represented by counsel so things are spelled out in writing.

Great post and very good information.  Thanks very much!

I just wanted to stress the importance of the Title Search, and Insurance. We have had fraudulent people pose to be the owners of a vacant home and rent it to unsuspecting Renters. Then they loose not only the home they move into when the real owner finds someone living in the home, but they loose their entire deposit/rent/ down-payment. I just Googled rent to own scams and got 503,000 responses. Check it out.

Lola,

Great information for us newbies.  I am seeing lots of people that want to rent to own/lease purchase.  Very informative..thanks

Renee Files

Very good information. It is very helpful that you brought up the title details. I never really thought that would be so such an issue. Great article, Lola.

Thanks,

Kathy Knight

Very nice article Lola.  It's always good to research the property for liens, etc. 

Tanya

The rent to own situation is not always what is is cracked up to be. All the best.

HI LOLA!

A well deserved Featured post.  Awesome information for folks embarking upon alt. methods of purchasing.  I'd love to re blog.

Harrison, thank you for your comment.

George, I would tend to agree with you.  Things can get messy quickly when a certain portion of the lease payment is accruing towards the downpayment.  I'm also not sure that this will be something that can be done in the future with the tightening of credit standards and lending guidelines.  My understanding is that most Zero Downpayment programs are at risk.  What are your thoughts?

Charles, that's great!  What area of the country do you practise in?

Robyn, what a fascinating comment.  I am not aware of the practise of the lender making this determination for transactions of this sort in Michigan.  If it is applied at all, it is usually pursuant to an arrangement between the buyer and seller.  It's always interesting to learn about customs and real estate practices around the nation.

Joan, that's good advise.  In Michigan, real estate agents can assist clients with leases.  It's important to keep these types of issues in mind.

You're welcome Gabe.  Thanks for stopping here to read and comment.

Wow, Kelly!  Thanks for your comment.  Yet another reason to get a title search.

You're Welcome Renee.  Thanks for reading.

Tanya, Thank you for your comment.

Bob & Carolin...there's a lot to place under consideration.

Yvette, thanks for your comment.

Hi, Lola. You certainly share some interesting concerns, ones that quite honestly, on my mortgage end, I hadn't really considered. A bigger concern to me as a lender is that, from my experience, my observation is that Lease/Options are kind of like the new Land Contracts- typically buyers with poor credit are the ones inquiring about them. Because it's a lease with option to buy, it seems the deposit has no limits, unlike laws that protect renters from exorbitant deposits. The biggest problem I see in them is that there is usually a catch! If the buyer doesn't qualify for a mortgage within a set time frame, they typically forfeit their deposit. I recommend that the buyer continue to rent, take that money that they would have paid for the large deposit, and use it to address credit blemishes. This will truly get them a step closer to home ownership.

Lola, great tips for the buyer. There are many more of these emerging now. 

Lola, the only "No Money Down Programs" that we have left are VA, Connecticut Housing Finance Authority (CHFA), and the USDA (old Farmers Loan) left.  The Flex 100 is not available right now, and My Community is no longer available at 100%.  Also as of last Wednesday the DPA's like Nehemiah, and AmeriDream are gone as well.

Lola, your checklist is right on and brilliant! Over the course of the last few years I've seen just about each one of them come into play...and it can be nasty.

This is wonderful advice and should be taken to heart. So many things could happen.

I needed this refresher...thanks.

Later in the rain~Deb

Lola,

It is always a pleasure to read what you have to say about the trends in the market place.  I am going to look into knowing more about the lease structure, at least in the Grand Rapids market and will keep you posted. 

Reading these comments only confirms what we talked about in the meeting.  Times are tough and we have to always be one step ahead of the fraud.

Danell, Thank you for sharing the caution about the DEPOSIT and the fact that because the PURCHASE has been inserted in the transaction, it may no longer be subject to the protections and limits imposed by the law on a normal rental transaction.  That is a very important consideration for a buyer to keep in mind particularly if they have provided a substantial amount of money towards a future downpayment.

Thank you for your comment Adriana.  It seems that the increase in this trend is happening across the nation.

George, Thank you for coming back to answer my question.  If the Zero downpayment option is no longer in play, I wonder what the implications will be for buyers who have already entered into these types of transactions and are thinking that they will have a financing vehicle which allows this type of credit from the seller.  Are you anticipating that the few programs that you have left will continue or is it just a matter of time...

Hi Deb, Thanks for stopping by to read and comment.

Hi Keith...Thanks for being the Inspiration for this blog post.  Your presentation to our team on Monday has obviously been helpful to a lot of agents and individuals in the Grand Rapids, MI area and around the country.  It just proves that we have to keep abreast of the latest information as the market continues to shift.  Thanks again for taking the time to share your knowledge with us...and the world. :)

Lola, generally if someone is not a first time home buyer then they don't usually have a need for no money down, because hopefully they have equity in the property that they are selling.

The no money down programs that we have VA, And CHFA are not in danger of being eliminated.

Hi Lola-

It's no wonder you are at the top of MI AR! Great post chocked full of information. Thanks for sharing and greeting from Paradise.

Luckily the state of Texas does not have a lease to own form nor can we produce one without an attorney.  I would never advise a seller to enter into such an arrangement as there is no way to tell what the market value would be in a year.  As I do not work with buyers...I have no comment.

In my area I have noticed quite a few builers are doing this to get rid of the homes they have built that are just setting empty.  The only thing that I think is bad about it is that they want some inflated purchase price on the home if you decide to do the lease option.

Thanks for the note of clarification George.  Your comments from a lenders perspective have been very helpful.

Greg, Thank you & greetings to you as well.  I appreciate your stopping by to read and comment on my post today.

Tim, there is a risk factor on both sides in regards to value.  The buyer could end up committing to an investment which is worth less than what the original lease to purchase agreement states.  The Seller could find themselves in a situation in which they sell their home for less than they could gain in a future market.  The  fiduciary relationship becomes critical in protecting the best interests of the party you represent. 

Norma...thanks for your comment.  Another potential hidden danger is mechanics liens.  If the builder goes into default and has not paid the subcontractors, this could put a potential buyer into the middle of the mess. 

Lola excellent work in presenting the pitfalls of the rent to own scenerio. BTW - I had noticed your posts while fooling around with outside.in last week:)

Lola,  Great post.  We are seeing a lot of foreclosure notices posted on renters doors these days.  The renters are very irate and want to know why the owners are not using their rent monies to pay the mortgage.  In most cases they are but it does not cover the full amounts and when their funds run out they can no longer pay and the banks move in to foreclose.

Hi Bill, Thanks for your comment.  I appreciated your excellent post on outside.in too.

Hi Jackie, The situation you described in your comment is all too common.  This can happen when the initial rental agreement doesn't cover the owner's obligations or if the amounts due are raised due to things like an increase in the escrow amounts for taxes.  Cash strapped owners may have a hard time keeping up and then default.

Thanks for a great article. Rent to own seems to be the buzz phrase of the hour. It is critical that both seller and buyer know and fully understand that there are some risks. Ron Tiller

Lola - Really valuable information here. I think all too often folks do not consider the potential consequences of these situations, and the difficulty of determing a reasonable price at some future point in time. Some times the risks just outweigh the advantages.

This is really useful for those of us with limited experience in dealing with these transactions. Gotta bookmark this one.

Jeff

Hi Ron, It's definitely becoming a greater portion of our transactions here in Grand Rapids. Our Board will now have a section of the MLS dedicated to residential leasing.  It is important that we all become more aware of the different implications which may impact a lease with option to purchase transaction.  We found Keith Jarrett's presentation very valuable.

Hi Jeff, Thanks for stopping by.  This type of transaction is something that commercial agents tend to have more familiarity with.  Many associations do not even provide residential lease forms.  But with the situation in the market, we're seeing a lot more sellers considering this and more buyers who are willing to do this for a variety of reasons.  There's a lot to think about though...

Good evening Lola,

The separate section for leases is long overdue but it will have to wait a bit. There are still some issues with the existing elements of the new MLS and the wish list has been put on hold until things are running a little more smoothly. There has been a ton of work done and the end is in sight. It has been an interestinng year for the directors and those of us on the technology committee.

Ron

Hi Ron, I'd just heard that the Lease Section was a 'go' this week.  From your comment, it looks it might be little bit of a wait.  There have been so many new challenges that our local associations have had to deal with over the past 24 months.  I'm thankful for people like yourself who are diligently working to provide the tools that agents will need to function effectively in the years ahead.  Please feel free to update here as more information becomes available on this topic in our area.  Thanks.

Sellers need to be very careful when doing a "rent-to-own" or a lease-option.  They do not fall under the same category as regular rental agreements.  Once an option to buy is attached, it now becomes a equitable mortgage. 

www.mfi-miami.com

Great article and comments as well.  Why couldn't the renter have his rent payment deposited directly into the mortgage holders' mortgage account.  At least this way the potential homeowner would know that the payment is being made?  Or into an escrow account?  Or have the check made out to the mortgage company but send it to the property owner so that they know that the payment is being made?

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