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Rent-To-Own Real Estate: How The Process Works

Rent-To-Own Homes: How The Process Works

By Jean Folger

 

 

 

 

In a typical home purchase, the sale takes place shortly after the offer has been accepted, and the transaction is completed at closing. Since most buyers don’t have the money to pay cash, a mortgage is usually used to finance the purchase: The buyer puts down a certain percentage of the purchase price (the down payment), then pays the lender in regular installments over a period of time until the balance is paid off in full.
To qualify for a mortgage, however, potential buyers need to have a good credit score and cash for a down payment. Without these, purchasing a home in the traditional way may not be an option. There is an alternative: a rent-to-own agreement. When buyers sign this kind of contract, they agree to rent the home for a set amount of time before exercising an option to purchase the property when or before the lease expires.
Here's how rent to own works, and when it may be a good choice for someone looking to buy a home.

Elements of a Rent-to-Own Contract

In a rent-to-own agreement, potential buyers gets to move into a house right away, with several years to work on improving their credit score and/or saving for a down payment. While many states have their own regulations, and no two rent-to-own contracts are alike, someone in a rent-to-own agreement typically rents the property for a set amount of time (usually one to three years), after which he or she can purchase the house from the seller. It’s not as simple as paying rent for three years and then buying the house: Certain terms and conditions must be met, in accordance with the contract.
Option Money: In a rent-to-own agreement, the potential buyer pays the seller a one-time, usually non-refundable fee called option money, or option consideration. This gives him or her the option to purchase the house in the future. It is important to note that some contracts (lease-option contracts) give the potential buyer the right but not the obligation to purchase when the lease expires. If he or she decides not to purchase the property at the end of the lease, the option simply expires. If the wording is "lease purchase," without the word option, the buyer could be legally obligated to purchase the property at the end of the lease. Clarifying the wording is one of many reasons buyers should have the contract vetted by a real estate attorney before agreeing to it.
The size of the option is negotiable. There's no standard rate. It typically ranges between 2.5% and 7% of the purchase price. In some (but not all) contracts, all or some of the option money may be applied to the purchase price at closing. That's a valuable clause. Consider that if a home has a purchase price of $200,000 and a 7% option consideration, the buyer would need to pay $14,000 up front.
Purchase price: The contact will specify when and how the purchase price of the home will be determined. In some cases, the buyer and seller agree on a purchase price when the contract is signed – often at or higher than the current market value. In other situations, the buyer and seller agree to determine the price when the lease expires, based on market value at that future point in time. Many buyers prefer to “lock in” the purchase price if possible, especially in markets where home prices may be increasing.
Rent: During the term of the lease, the potential buyer pays the seller a specified amount of rent, usually each month. The lease term is negotiable, but frequently ranges between one and three years. In many contracts, a percentage of each monthly rent payment is applied to the purchase price. For example, assume the contract states that the buyer will pay $1,200 each month for rent, and that 25% of that will be credited to the purchase. If the lease term is three years, the buyer will earn a $10,800 rent credit to apply toward the purchase ($1,200 x 0.25 = $300; $300 x 36 months = $10,800). Often, the rent charged by the seller will be slightly higher than the “going rate” for the area to accommodate the rent credit the buyer receives.
Maintenance: Depending on the terms of the contract, the potential buyer may be responsible for maintaining the property and paying for any repairs, homeowners association fees, property taxes and insurance. Because the seller is ultimately responsible for association fees, taxes and insurance (it’s still his or her house, after all), the seller may choose to cover these costs. Even in that case, the buyer still needs a renter's insurance policy to cover losses to personal property and provide liability coverage if someone is injured while in the home or if the buyer accidentally injures someone.
Be sure that maintenance and repair requirements are specified in the contract. Maintaining the property – mowing the lawn, raking the leaves and cleaning out the gutters – is very different from replacing a damaged roof.
Purchasing the property: If the potential buyer decides not to purchase the property (or is unable to secure financing) at the end of the lease term, the option expires. The buyer forfeits any money paid until that point, including the option money and any rent credit earned. If the buyer cannot purchase the property but has a legal obligation to (as stated in the contract), legal proceedings may be initiated.
If the buyer wants to purchase the property, he or she typically applies for financing (i.e., a mortgage) and pays the seller in full. According to the terms of the contract, a certain percentage of the option money and rent paid may be deducted from the purchase price. The transaction is completed at the closing, and the buyer becomes a homeowner.

Ideal Candidates for Rent to Own

A rent-to-own agreement can be an excellent option for people who want – but are not financially ready – to become homeowners. A rent-to-own agreement gives them the chance to get their finances in order (by improving their credit score and saving money for a down payment, for example) while “locking in” the house they’d like to own. If the option money or a percentage of the rent goes toward the purchase price, they also get to start building some equity.
To make rent-to-own work, potential buyers need to be confident that they’ll be ready to make the purchase when the lease term expires. Otherwise, they will have paid the option money – which could be substantial – and a premium on rent for 12 to 36 months, with nothing to show at the end.
If there’s a good chance would-be buyers still won’t be able to qualify for a mortgage or secure other financing by the time the lease expires, they should instead continue renting (with a “normal” lease), building credit and saving for a down payment. Then, when they’re ready, they can choose from any home on the market in their price range.

The Bottom Line

A rent-to-own agreement allows potential buyers to move into a house (maybe even their dream home) while getting their finances in order to purchase the home several years in the future. It’s not without risks, since they could end up losing money if they don’t (or cannot) buy the property when the lease expires. It’s vital for buyers to read and understand every word of the contract and know exactly what they’re getting into.
For example, if the contract can become void if the buyer is late on one payment – he or she needs to know that in advance. Or if the seller can evict the buyer for not doing repairs, that needs to be understood before committing. A rent-to-own agreement is a legally binding contract that often includes complicated language. Even if a real estate agent assists with the process, it is essential for buyers to consult with a qualified real estate attorney who can clarify the contract and their rights, before signing anything.


Read more: Rent-To-Own Homes: How The Process Works | Investopedia http://www.investopedia.com/articles/personal-finance/100714/renttoown-homes-how-process-works.asp#ixzz48HcsvrHK
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RENT TO OWN WITH BAD CREDIT

INFOGRAPHIC: Rent to Own

Have you been shopping around for a mortgage to purchase a home for you and your family? Are you tired of being rejected? We completely understand the situation you’re in and we want you to know that their is a solution to your mortgage issues. Renting to own is a great way to get the house you want without having to deal with the banks that keep rejecting you.
Take a look at the infographic below to visualize what renting to own a home is all about.

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<a href=”http://loanscanada.ca/blog/infographics/rent-to-own/”><img src=”https://loanscanada.ca/wp-content/uploads/2012/09/rent-to-own-infographic.png” alt=”rent to own infographic”/></a>

  11

Rent to Own Program

                 Rent to Own Homes: an Option to Consider?

Colleen Kane | @ColleenKane Tuesday, 22 Jan 2013 | 12:13 PM ETCNBC.com


When the term "rent to own" pops up, it's not always clear what it means, and that's partially because renting to own and the similar plan lease/option can work numerous ways. However, in a typical scenario, tenants can rent for a set period, such as a year, then when that time is up, they have the option to purchase the home. A portion of the rent is often credited to the sales price or closing costs.
Tenants may also purchase the option to buy the property for a predetermined price at the end of their lease by putting down a (non-refundable) payment of about 3 percent. With this option in place, the tenant is not bound to purchase at the end of the lease, but meanwhile, the property owner can't sell to anyone else.
Plans like this can appeal to people with little or no savings for a down payment, or people with bad credit or no credit who don't qualify for traditional mortgages. The latter group can include those who lost their homes in foreclosures, according to real estate investor Barb Getty, who has had both positive and negative experiences with rent-to-buy contracts.
Renting to own is also a way to get into a desired neighborhood in a timely matter, as with parents who need to be in school district for their kids, or people who are uncertain of their timeline, according to San Francisco real estate professional Herman Chan. "It's a way to get into a house without committing to a 30 year mortgage," he said.
It's not a very common practice. Of the 609,482 sales transactions on record in San Diego from 1990 to the present that were conducted with a real estate agent, only 782 were completed with a lease option contract, according to the San Diego Association of Realtors.
Let's take a look at the pros and cons. For those doing the lease option rental, the primary benefit to the buyer is that or or she can lock in a price, according to Phil Georgiades, the chief loan steward for VA Home Loan Centers in California.
However, there are numerous concerns and potential drawbacks that make rent to buy more complicated and often more expensive than straight renting. Among them: the tenant's rent payment will likely be higher than market rent as part of that will be going toward the eventual down payment on the property. This extra amount will be forfeited if the tenant doesn't act on the option to buy.
The potential buyer may be responsible for paying any back taxes the current owner may have incurred, said Georgiades. Also, prospective home buyers will still need to have the home inspected, just as with a traditional home purchase.
Getty points out that if the renter/buyer can't make payments anymore, that means foreclosure, not just eviction.
However, John Farrell, an Episcopal priest, had a positive experience transitioning from renter to buyer of his apartment at the Riverview Club in Yonkers, N.Y. Two years ago, when a heart attack forced him to retire, he signed a lease on an apartment with option to buy (there was no fee for the option), and after one year he purchased the apartment, putting 10 percent down. His first year of rent went toward lowering the purchase price about 5 percent — the equivalent of six months' rent. "It was a can't lose situation for me," he said.
Other experts are not convinced. "Very rarely does it make sense to rent to own. It's a complex process, [and] most people don't understand what they're getting themselves into," said Denise Winston, financial expert and author of "Money Starts Here! Your Practical Guide to Survive and Thrive in Any Economy." "If they had more discipline with their finances they could do this on their own without the risk of the market, without the risk of losing all the money if something defaults."
"It is a complicated deal and very speculative," echoes Melinda Estridge Long, a real estate broker in the Maryland-Washington, D.C., area. "I have gone down this path with a few clients and have found it to be a large risk for both buyer and seller, as both are required to agree on a price in the future — always a crap shoot," she said. "It is almost better to do a rent with a possible option to buy when the time comes."
For those who don't have 20 percent down payment money lying around, Georgiades suggests some alternatives: there are low down payment options, and government home loan programs lending to people with bad credit or who have low income and little savings.
"The best option is boring, but tried and true," said Brandon D. Smith, a senior analyst in Los Angeles. "If you're renting, and can afford higher payments, don't rent-to-own. Put the difference in an interest bearing account and build up your credit. Have a stable income. If you're a first time home buyer, you only need 3 percent as a down payment. Then buy a house with a long term, low fixed rate loan. At some point you may be able to fool some sucker into renting to own from you." 


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A 5-year plan rebuild Black wealth and expand homeownership

A 5-year plan rebuild Black wealth and expand homeownership

By Charlene Crowell
Contributing Writer
While economists contend that the economic recession is over, the reality for much of Black America is starkly different. Racial disparities in unemployment and under-employment persist. And homeownership, a key measure of economic health for consumers and communities alike continues its downward decline even now.
According to the U.S. Census Bureau, during the last few months of 2015, 41.9 percent of Black households owned a home, compared to 72.2 percent of whites and 63.8 percent of all households across the country.
Many consumers and real estate professionals agree that redlining remains a serious problem. Despite federal and state laws guaranteeing fair housing and credit laws, majority-Black areas often do not have adequate access to credit.
Even worse, at a time when private mortgage interest rates have remained consistently low, very few Black borrowers have been able to benefit from these loans. The private market’s least costly convention mortgages have become out-of-reach for communities of color. In 2014, only 2.6 percent of owner-occupied conventional home purchases – approximately 45,500 nationwide – were made to Black borrowers. Other Census Bureau data show there are 9.9 million Black households, where 1.8 million people ages 25 and older hold a graduate degree.
Were it not for the array of government-backed mortgages – VA, FHA and USDA loans, homeownership rates for people of color would be even lower. In 2014, 68 percent of loans made to help Black borrowers purchase homes were backed by these federal programs.
In response to these disturbing findings, a five-year plan to add two million more Black homeowners has been launched by the National Association of Real Estate Brokers (NAREB). Founded in 1947 from a need to secure the right to equal housing opportunities regardless of race, creed or color, NAREB’s mission remains vital today.
“NAREB has taken the initiative to be in the vanguard to rebuild wealth in the Black community,” said Ron Cooper, NAREB’s president. “We are prepared to use every tool at our disposal … advocacy in the halls of Congress … expanding our army of informed and committed real estate professionals … engaging the active participation of informed organizational collaborators and lending partners …vigilance to the need to build and rebuild economic wealth through homeownership for Black Americans, regardless of the ‘issue of the day.’”
Beginning in February, NAREB has taken its message and advocacy to major cities facing severe housing challenges: Chicago, Memphis, Oakland and Philadelphia. By bringing NAREB’s message “closer to the ground”, respective Black communities were informed and engaged by more than 800 participating real estate professionals.
Those in attendance learned more about homeownership disparities in their own city, as well as the value and benefits of homeownership as a wealth-building tool. Each forum included housing counselors, legal and title experts, financial partners and other speakers that together explained what it takes to buy and own a home.
A second series of forums in four more cities is now being planned for 2017.
Progress towards the goal of two million more homeowners will be measured through a database management system that will track and capture sales activities across the country. Both NAREB members and participating lenders will have access to the system. Its data will augment findings from the annual Home Mortgage Disclosure Act (HMDA) report that tracks mortgage lending by race.
Commenting on NAREB’s efforts, Keith Corbett, an Executive Vice-President with the Center for Responsible Lending (CRL) and a NAREB partner noted, “When many Black families are paying $1,000 or more each month for rent, they are losing the chance to build wealth for their families. CRL views NAREB as a vital partner in advocating financial fairness for all.”
“The housing finance system must do a better job at providing mortgage credit to borrowers who represent the future,” added Corbett.
Earlier CRL mortgage research found that across the country from 2007 – 2011, foreclosures drained more than $2 trillion in property value, from families who live nearby foreclosed homes. More than half of these losses fell on either Black or Latino communities.
“Owning a home has been the way we’ve sent our children to school, financed our businesses, passed wealth on to our families, and kept our communities desirable places to live,” added NAREB’s Cooper. “The economic tsunami devastated our communities and halted our collective ability to be participants in and economically thriving members of this country’s greatest promise to its citizens: the dream of owning a home.”
For more information on NAREB, visit its website at http://www.nareb.com.
This article originally published in the May 2, 2016 print edition of The Louisiana Weekly newspaper.




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Throwing Money Away...

Buy vs. rent a home: When renting isn’t “throwing money away”




Military personnel writes..


I have to move every 3-4 years for work, and so does everyone else I work with (military). A LOT of coworkers buy and sell a house at each duty station, because someone told them, “Since you never see rent money again, buying a house is usually the better financial decision.” And I’m here to tell you that’s BS when you’re buying a home for a short time (less than 4 years). Just like rent, there is a lot of money going out the door when you own a home that you’ll never see again.
Traditionally, owning a home is pitched as a good investment, because you build equity in the home by paying off the mortgage principal. True statement. But consider all the rest of the money you have to shell out along the way to do that:

• Mortgage interest (this is usually the largest piece of the pie, especially early in the mortgage)
• Property taxes
• Home owner’s insurance (HOI)
• Flood insurance
• Mortgage insurance (if your downpayment was less than 20%)
• Maintenance/repairs
• Condo or HOA fees (for those types of communities)
• Realtor/lawyer fees when selling (and sometimes buying)
• Closing costs (buying and selling)

In some cases, these can total to be more than what it would cost you to rent a similar place, especially over a short time horizon (less than 4 years). The reason for this is because the interest on the mortgage is the greatest amount when the principal of the mortgage is still high (i.e., early in the mortgage).
Taking a completely arbitrary example (but using realistic numbers), let’s say you can afford a $250K home, you have $25K (10%) to put on the downpayment, with a 30-year fixed rate mortgage at 4.50%. The property tax rate in your area is 2.00%.
If you put that info into a mortgage calculator, it will say your mortgage payment is $1140/month (which includes the interest on the mortgage, plus your principal payment). “Sweet!” you say, because that’s pretty affordable for a $250K home. But wait.

• Property tax = $4500/year = $375/mo
• HOI = $87.50/mo (Source: Zillow, $35/mo per $100K of home value)
• Flood insurance = cost can vary from $0 to a LOT (over $100/mo)
• Mortgage insurance = $93.75/mo (assuming 0.5% of borrowed amount of $225K)
• Maintenance/repairs = $2500/year = $208/mo (based on 1% of home’s value to use or save toward repairs)

How much you might spend on realtors, lawyers, and condo fees is completely dependent on the situation, and I won’t swag those numbers here. Hopefully I’m able to make my point without them—just keep those costs in mind if they apply to your situation.
Now, if you total all of that up, what you get is: $1904 and change per month to own. Plus, you’re building equity in the home! All the better. But if you take a closer look at that mortgage payment of $1140, there’s something important. How much interest are you paying versus principal in that $1140?
You can’t quantify this as a set number, because it changes every month. When you make a payment, part of the principal is reduced, so the interest on the principal is less the next month. But you can average it out over set periods of time.
In this example, with your very first $1140 payment you pay $844 in interest and $296 towards equity. Over the first year, you will have made $13,680 in total mortgage payments; $10,050 of that will have been purely interest on the loan. Only $3630 will have been equity in your home. After 4 years, the numbers are $54,720 total, of which $39,170 is interest and $15,550 is equity. In that 4 year span of time, the average amount you paid in mortgage interest per month was $816 ($39,170 divided by 48 months).
So, the final analysis has to be: once I tally all the money that goes out the door when I buy, is it more or less than what I can rent (which is also money out the door)? In this example:

• 816 (average mortgage interest over 4 years) +
• 375 (taxes) +
• 87.50 (HOI) +
• 93.75 (PMI) +
• 208 (repairs fund) +
• Any “other” costs (lawyer, realtor, condo, flood insurance, etc.)

Total = $1580, plus “other” costs. (Yes, I acknowledge some will say $200/mo for repairs is a lot, but you have to budget for repairs somehow, and a good rule of thumb is 1% of the value of the home per year.)
If you can rent a place that fits your needs for $1580 or less, you’re doing better renting the place than you would if you bought the $250K house in this example. You can invest/save what equity you would be building, plus you don't take on the risk of owning the home (depreciation, unforeseen costs).
TL;DR – Yes, you never see your rent money again, but there’s a ton of money when you own a home that you never see again either. You need to make sure the dead money when owning is less than the dead money when renting.

Lease Purchase or Rent To Own Home Sales

Lease Purchase or Rent To Own Homes

The skinny on lease-to-own home sales

Updated: November 8, 2015 — 3:01 AM EST                                                                

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by Jack Guttentag, TRIBUNE NEWS SERVICE

Jack Guttentag

TRIBUNE NEWS SERVICE

A lease-to-own house purchase is a lease combined with an option to buy the property within a specified period, usually three years or less, at an agreed-upon price.

In recent years, I have written several articles on LTOs, and they are among the most read on my website. The reason: LTOs offer the hope of home ownership to many who can't meet purchase requirements any other way. They also offer would-be sellers an opportunity to sell at a more attractive price than might otherwise be available.
Each side in an LTO transaction comes into it because of a weakness. In the buyers' case, it almost always is that they cannot qualify for the mortgage they need to finance a purchase. They may have a foreclosure on their record they must wait out or a credit score too low to meet lender requirements.
The LTO presents the opportunity to bet on themselves - the bet is that before the option period expires, they will qualify for the mortgage they need to exercise the purchase option.
In the sellers' case, the weakness is an inability to sell at what they consider the correct value. That could be because property values in the area have declined. The LTO offers the prospect of being able to sell in the future at a substantially higher price than is available today.
Another possible weakness that has become important in recent years is that the condition of the house is poor and the owner does not have the means to fix it. An LTO buyer is not as likely to be fussy about the condition of the house, and may be positioned to fix the deficiencies during the option period.

Contractual provisions. In a typical LTO arrangement, the borrower pays an option fee, 1 percent to 5 percent of the price, which is credited to the purchase price.
The borrower pays a market-rate rent and an additional payment that is credited toward the purchase price. The option fee, option period, rent, rent-credit payment, and purchase price are all negotiable. If the purchase option is not exercised, the buyers lose both the option fee and the rent-credit payment.
To the buyers, the option fee and rent-credit payment are part of the equity in the house they fully expect to own. To the sellers, however, these payments are the best guarantee that the house will sell; if it doesn't sell, the payments are retained as income.
That the benefit to the seller generally exceeds the cost to the buyer makes the lease-to-own deal a potential win-win.
Rent-credit payment. This is unique to LTO deals. It is an amount above the market-rate rent paid by the buyers that is credited back to the buyer at closing. Rent credits can be used in two different ways, which are not always distinguished.
The simplest approach reduces the sale price at closing by the total rent credit paid by the buyers. That reduces the required down payment only slightly. For example, if the sale price is $100,000 and the rent credit totals $5,000, the sale price becomes $95,000 and the down payment required at 5 percent falls from $5,000 to $4,750.

The rent credit is much more useful to the buyers if it can be used for the down payment in its entirety. If the rent credit of $5,000 in the example above is used in that way, the price of the house would remain at $100,000 but the buyers would receive $5,000 from the sellers at closing that could be used as down payment.
For that to work, however, the lender must accept the rent credit as legitimate savings by the buyers. To be sure that the rent credit is an amount paid above a fair market rent, the lender will require that the market rent be documented by an appraisal. To be sure that the buyers actually made the payments, the lender will want to see the canceled checks for the payments.
A more complete list of provisions that buyers and sellers can use in negotiating an LTO is on my website, http://www.mtgprofessor.com.


The LTO calculator. Mainly of interest to potential sellers, my LTO calculator, developed with Chuck Freedenberg of DecisionAide Analytics, allows sellers to view an LTO as an investment generating an attractive rate of return, relative to what the sellers could obtain by getting the best price in the current market.
The investment return is net of the costs of ownership during the option period, including mortgage-interest payments, property taxes, homeowners' insurance and other expenses of ownership. The calculator is available on my website.
Jack Guttentag is professor emeritus of finance at the Wharton School of the University of Pennsylvania.






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