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

Grand Rapids, MI

Over the past 18 months, we've seen a marked increase in the number of clients who are seeking Leases with an Option to purchase the property they are renting after a specified period of time. On the surface this appear to have the potential to be a WIN WIN for all parties to a transaction.

Homeowners who are unable to sell their homes have often welcomed the opportunity to have some income from a property while waiting for the market to rebound. For some potential home buyers, this arrangement afforded the opportunity to improve their credit scores and in some cases have a portion of their rent accrue towards a down payment when the option was eventually excercised.

However, there are some potential risks that home buyers should be aware of when considering if this type of sitatution is appropriate for any home they intend to eventually purchase. A few of these issues were covered by Keith Jarrett, a title representative with LandAmerica/Lawyers Title when he visited our office during a recent Monday morning agent meeting.

Here are some things that buyers should consider when considering a Lease to Purchase Option.

1. Make Sure You Check the Titlework

While it is true that you are not purchasing the home just yet, a title search can bring to your attention some issues which may affect your ability to purchase the home in the future. Here are some of them:

• Multiple Mortgages against the property which may inflate the amount needed to purchase the property

• Mechanics Liens for work that has been done by contractors but not paid for. This is particularly important if you are purchasing brand new construction, but may also apply to older homes too.

• Tax Liens: If taxes are owed on the property, they have to be paid by someone. If the owner is in default, you may have to pay these liens. Don't be caught off guard...check!

• IRS Liens: Once again, this type of lien can be assessed against a person's residence. Checking the title work will usually reveal if a lien has been filed by the IRS.

2. Read the Legal News

If you're paying rent on a home you intend to purchase, it is a shock to be informed that the property is in foreclosure because the owner has not paid the mortgage company. I have had buyers call my office in near panic when they found a foreclosure notice posted on their door. If the home that you are renting is foreclosed upon, you may need to contact an attorney to explore your options.

3. Ask to Examine the Underlying Mortgage

For some buyers, the ability to have a land contract rather than a simple lease with option to purchase is preferable. Be careful. Most mortgages today do NOT allow for land contracts. If a land contract is put in place, it can trigger what is know as the 'due on sale' clause.

In this case, the lender may call in the entire mortgage within a short period of time, such as within 30 days. Don't place yourself in a situation which could leave you out on the street because you inadvertently participated in an illegal transaction.

4. Inquire about the Value of the Equity

A new ruling just handed down over the past week requires home owners who are renting their homes so they can purchase another one, to have 25-30% equity stake in their current home or be able to qualify for the New Mortgage with both mortgage payments. If you're buying a home in which the seller's intention is to move, make sure that they can afford to. If they can't guess who won't have a roof over their heads?

If you are considering a Lease with an Option to Purchase, please feel free to contact Audu Real Estate if you live in the West Michigan area. Our agents will be happy to review your situation and give you the benefit of our professional counsel.

Copyright 2008 Audu Real Estate All Rights Reserved

Image of row houses by Lola Audu

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