06 July 2009

Rent-to-own agreements expand real estate purchase options

Rent-to-own agreements expand real estate purchase options

President’s Message

Chris Sloan


                With larger down payments and higher credit scores required to obtain mortgage financing in today’s post-subprime era, an increasingly popular rent-to-own agreement may be the solution for cash-strapped buyers looking to take advantage of today’s competitively priced real estate.

                Called a lease option, the arrangement is where a buyer agrees to rent a property and then purchase it at a later date. The agreement is a cross between a typical purchase contract and a lease, and is essentially like having a purchase contract with a delayed closing.

                In these deals, a buyer will typically agree to pay an upfront fee for the “option” of purchasing the property at a later date for an agreed-upon price. In other words, the buyer is simply buying the option to purchase the property itself at a later date. This fee will eventually go toward the buyer’s down payment if he or she decides to go through with the purchase; the money will be non-refundable if the buyer decides to back out of the deal.

The contract will also stipulate a monthly rent payment, often with a portion of the rent going toward the buyer’s future down payment. During the rental term, often one to three years, the buyer will have time to save money for a down payment as well as work on improving his or her credit score. For example, if a buyer paid $5,000 for the option to buy a $200,000 home and $400 of the $1,400 rent payment went to the purchase, the buyer will have saved $9,800 after one year and $19,400 after three, according to a CNN Money article.

                Along with the opportunity to save money and improve their credit scores, buyers also have the major advantage of getting to know the neighborhood and the area before actually purchasing the property. If a buyer discovered he hated the neighborhood after a few months, he could decide at the end of the lease term not to buy the property, losing only his upfront payment and the portion of the rent payment that would have gone toward the purchase.

                Lease options are ideal for homeowners who have purchased another home and are having difficulty selling their first home. The lease option allows them to receive monthly cash that can help offset mortgage costs, and they know the tenants are more likely to take better care of the property because they have a stake in it.

                Nevertheless, because a lease-option transaction can be more complicated than others, it’s important for both buyers and sellers to work with an experienced Realtor and understand the risks of this type of agreement.

                Buyers should take several steps to make sure they are happy with the property and are working with a credible seller. Before the contract is finalized and the upfront option money becomes non-refundable, buyers should conduct a thorough inspection of the property to find out about any potential problems, like a leaky foundation or a damaged roof. Buyers will also want to get a title report to make sure there aren’t any problems that could prevent the homeowner from selling the property at the end of the lease period. Excessive liens on the property could be one red flag. Buyers should also look for any signs that the property is headed toward foreclosure.

                Risk reduction steps for the homeowner include making sure the agreement requires the tenant to provide notification of his or her intention to purchase the property 30 to 60 days before the lease expires. This is because the seller always risks that the buyer will decide not to purchase the property. If the seller knows the tenant is not going to exercise his or her option to purchase, the seller can begin marketing the property before the lease expires.

                Most importantly, both buyers and sellers should make sure they work with professionals and understand the terms and agreements of their contracts. A real estate attorney can help you avoid any legal pitfalls, and a Realtor will help you negotiate the purchase of the property. To learn more about Utah real estate and to find a Realtor, visit UtahRealtors.com.


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