ATLANTA (06/17/09)--In an environment of poor credit and tight financing, some home sellers are offering rent-to-own options. While this approach may seem appealing, buyers need to understand both the advantages and disadvantages (CNNMoney.com June 4).
In a rent-to-own, also called lease-option, the renter pays an upfront fee--typically 5% of the home's purchase price--for the option to eventually own. The renter and seller draw up a contract detailing the monthly rental payments and expiration date, typically 12 months to 36 months. A portion of each month's rent is income for the seller, while the other part is a "credit" toward the potential buyer's down payment. When the contract terminates, the buyer can either put the option fee and rental credits toward the purchase of the house, or opt out and lose what's been paid in.
Before signing on the dotted line, buyers should understand the pros and cons (Forbes.com March 2):
No need for loan approval. With lending standards tight, many consumers may find their current credit score doesn't qualify them for a mortgage, making rent-to-own a viable option.
Buys time to boost credit score. A lease option allows hopeful owners to develop a good bill-paying history, build equity and position themselves for securing a loan in a few years.
Builds up down payment. Down payments of 20% to 30% required by lenders can be daunting to potential buyers. With rent-to-own, down-payment contributions compound monthly.
Locks in price. Even if a buyer with a higher offer comes along, your price is locked in to the contract. And, if property values rise, your lower price becomes a deal. Read the fine print. Be sure the seller cannot terminate or renegotiate the arrangement; if home prices increase, the seller will want more money, or an out.
Mortgage rates may increase. Mortgage rates haven't been this low since the 1950s. If you opt for the rent-to-own option, you may face higher interest rates at the end of your contract.
Fees may get expensive. If you don't buy at the end of your contract, you lose your option fee and all the money you paid in rent--possibly thousands of dollars.
Late payments not forgiving. In most rent-to-own contracts, late rental payments void the rent credits for that month. Sellers pocket the money that otherwise goes toward the down payment.
Home values may fall. If property values decrease, a renter paying a rate based on the original list price ends up being overcharged.
Rent-to-own options may help those serious about buying a home, but it can be a money trap for others. Before agreeing to a rent-to-own, do your homework. Ask for a title report to make sure the property is free of liens, get an appraisal and an inspection, and seek legal help to avoid contract mishaps. You will have to pay for these services.
For more information, read "Use Home Value Search Engines" in Plan It: Retire Ready Toolkit.
courtesy of cuna.org