Lease to Own - A Worthwhile Method for Purchasing a Home?
Leasing to Own is a creative method of essentially writing a long term purchase contract on a home with two big differences. You can move into the home immediately, and you lease the home until the contract closes.
Such ‘Lease to Own’ options tend to appeal to a few select groups:
1. First time homebuyers with low-credit, no down payment, or are in some way unable to afford/obtain a mortgage or even a second mortgage loan.
2. Illegal aliens, persons seeking citizenship, or persons who need time to find a family member to cosign with them.
3. Investors who wish to gamble that a home will go up in value, but don’t want to risk too much if it does not. They will occasionally make use of a home equity line of credit or a 2nd mortgage loan in order to float the rental costs.
4. The constantly evicted who otherwise cannot find places to rent. (Sellers sometimes get desperate to fill the property and as a result are not as thorough in background checking)
For most first time home buyers leasing-to-own is a BAD IDEA. Chances are that almost every lease to own property you find will be constructed to result in one of the following outcomes:
1. Buyer agrees to rent the house for more than it would normally rent for, with the understanding that a small amount per month will be applied to the purchase price should you purchase in a year or more.
2. Buyer spends all kinds of money fixing up the house, making repairs, and so on. Buyer generally believes he or she will own the house so they take better care of it than if they were just renting.
3. X year(s) pass, and it’s time for the buyer to buy the house. One of three things happens:
a) The property has decreased in value —–> so the buyer walks away, losing a few thousand dollars in what was paid to extra rent, plus all the repair costs, new carpet, custom blinds, paint, landscaping etc.
b) The property is worth less —–> buyer stupidly buys at originally negotiated price because of money already sunk into the home.
c) The property has increased in value —–> seller then tells buyer about the new, higher price. Buyer threatens to sue, seller laughs. Seller sells for higher price, either to buyer…or a new sucker.
Keep in mind that smart real estate investors use the lease-option scam to extract extra money out of their investment properties. If you own investment property, a carefully constructed rent-to-own option can make you several thousand dollars AND get you a good renter.
Leasing to own is usually a BAD idea for illegal aliens, and others who are currently unable to get a loan, but think they might be able to find someone to cosign or get the loan for them in a year or two.
Having someone else own your home is just asking for trouble. Also, since home loans can be such a complicated process, it is very difficult to predict accurately that you will be able to get a loan or even a Utah home equity loan in time to purchase the home.
That said, if you find a deal (which investors often do) locking it in a long term lease to own contract could be a wise way of gambling. Should home fall in value, you can walk away relatively unscathed (vs actually owning it).
Doing so REQUIRES a good attorney to help you construct a bullet-proof contract so that you can actually purchase the property should it increase in value. You should also try to contract the option of subleasing, as you may not actually want to live in the home, and subleasing is an easy way to minimize loss, and possibly even break even. Sellers may resist this (for obvious reasons, as you could potentially sublease to a very destructive renter)
Always be creative when approaching a seller, as proposing a rent-to-own could be an excellent method of buying a property with minimal risk. For the reasons already listed above, a buyer should generally avoid properties already being marketed as lease-to-buys.
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[…] sbeck wrote a fantastic post today on “Lease to Own - A Worthwhile Method for Purchasing a Home?”Here’s ONLY a quick extractInvestors who wish to gamble that a home will go up in value, but don’t want to risk too much if it does not. They will occasionally make us of a home equity line of credit or a 2nd mortgage loan in order to float the rental costs. … […]
[…] sbeck wrote a fantastic post today on “Lease to Own - A Worthwhile Method for Purchasing a Home?”Here’s ONLY a quick extractInvestors who wish to gamble that a home will go up in value, but don’t want to risk too much if it does not. They will occasionally make us of a home equity line of credit or a 2nd mortgage loan in order to float the rental costs. … […]