Rent to Own Options for Homes
Renting to own a home has become the wild west of real estate, with little oversight, deals that vary wildly, and big risks but potentially big rewards for buyers and sellers. However, doing your homework in advance so you can understand the varieties of lease option deals, along with hiring good legal counsel, helps tremendously.
Renting to Own
Rent-to-own deals, also known as "lease purchase" or "lease option" agreements, are not sale agreements, but still represent a tremendous opportunity for landlords and tenants. Tenants also assume a great amount of risk, because they do not have any ownership stake in the home. Tenants purchase the right to buy the home via a payment known as the lease option, paid at the lease's inception. Terms usually last two to five years. The lease option is calculated as 1 to 5 percent of the home's sale price, which is determined and agreed upon by both parties in advance. Tenants also pay a rent premium (above-market rent). Both the premium and the option fee are credited toward the down payment, but if the tenant can't get a mortgage, he forfeits both.
Contract for Deed, or Installment Land Contracts
Contract for deed deals, also known as land contracts, are legitimate sale agreements. In a land contract, the buyer pays a mortgage payment, including interest, to the seller. The buyer also makes a down payment to the seller, but it's smaller than what a bank would demand, and ranges from 1 to 10 percent of the sale price. The buyer is responsible for maintenance and property taxes, as well.
The difference between a land contract and a seller-financed mortgage is that the seller retains the deed to the home as collateral. Terms are usually a 30-year note payable after 10 years, at which point the buyer refinances to a traditional mortgage.
Seller Financing
In a seller-financed mortgage, the seller becomes the lender and writes the buyer a mortgage note. The buyer typically makes a large down payment --- at least 20 percent --- and makes a monthly payment to the seller, including principal and interest. The seller may opt to hire a servicing company to administer the details of the mortgage, such as sending monthly statements and issuing tax forms. Sellers who own their homes free-and-clear may find the deal financially rewarding, especially if an interested buyer has enough cash and income to purchase the home but cannot qualify for a mortgage (for example, if the buyer has poor credit or income that isn't properly documented). After a period of time, usually five years, the buyer refinances the mortgage with a traditional lender, as a seller probably doesn't want to own a 30-year mortgage note.
The FHA Alternative
If you're considering renting to own because of cash or credit constraints, it's worth investigating an FHA loan. FHA loans are distributed through traditional lenders, but because they're federally backed, lending guidelines are less strict. For example, a buyer may only have to put up 3.5 percent as a down payment. Credit scores don't need to be perfect, either; "fair" scores may still qualify for loan approval. Loan limits apply, and where you live determines that maximum loan amount for which you're eligible. Regardless of what option you choose, hire good representation who will negotiate on your behalf and protect your interests. You won't regret the advance homework.
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