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Dear Phyllis,
Because we are cleaning up our credit and can’t get a loan, we would like to try to find a rent-to-own opportunity. Can you explain the pros and cons of lease options, how they work and where we can find these listings?
JLM
Dear JLM,
People more often refer to lease options as the source for rent-to-own listings. The best way to find these opportunities is to work with a real estate agent who is very active within the community. Unfortunately, your major hurdle is likely your credit. If a bank doesn’t believe you are credit-worthy, it might prove difficult to convince a homeowner to rent to you.
Lease options are uncommon for a variety of reasons. But first, I will address how one might be structured.
Typically, the tenant will give the owner a non-refundable deposit. If the option to buy is exercised, the negotiated purchase price and the time frame to exercise the option (typically within one to two years) will be applied to the selling price. Be certain to talk with a reputable lender. Verify that you can qualify for a mortgage within said period.
Assume this scenario: You and the owner (seller/landlord) agree that the home’s purchase price will be $1,000,000. You have two years to exercise the purchase option and will pay $4,000 monthly rent. If the option to purchase is exercised, your 3% ($30,000) non-refundable deposit and $500 of each month’s rent is credited towards your $1,000,000 purchase price.
There are very few reasons a home seller would consider a lease option in today’s heated real estate environment. Tax considerations could be a reason. But why would a homeowner want to sell at today’s value if they believe their home’s value will continue to increase? Or on the flip side, if values drop you may not want to purchase the home at the agreed upon price. Even if you decide to overpay for the home, you might have difficulty obtaining a mortgage. Lenders base their loan to value on the purchase price or appraised value, whichever is less.
Why not meet with a reputable lender and begin to work on repairing your credit? A shorter-term lease option – might be easier to find. When a vacant home has been on the market for several months without selling, the owner may be open to a short-term lease option. This may provide you with the time you need to get your credit in order. Best of luck to you.
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