Can someone explain how rent to own works

[UpmyscoreinFL]

I am considering looking at the rent to own option when my current lease is up in august. I am pretty confident I can get my credit score where it needs to be but because I have a late pay on a credit card in December I cannot qualify for a mortgage until this time next year. I have seen web sites where you can sign up for a list of rent to own houses. How do you find a realtor that specializes in this? What I really want to do is just rent a house that I can then buy within a year so that I do not have to move twice. Any suggestions or advice?

[sr383]

Most of the rent-to-own offers I've seen are set up as follows:

1. You rent a piece of property at higher-than-market price, and a portion of that money is set aside toward your eventual down-payment, should you choose to buy the house. (We'll call it escrow, for lack of a better term.)

2. The owner guarantees the price at which you can buy the house in the future (usually 2 years from the date you first move in).

3. Over the course of the next two years, you are encouraged to contribute "sweat equity," making repairs and improvements such that the difference between the pre-negotiated sales price and the eventual appraised value tilts heavily in your favor.

4. At the end of two years, you have the right to buy the house at the pre-negotiated sales price. You are credited with the escrow you've paid into over the course of the past 24 months.

5. You are responsible for securing financing through whatever means are available to you (conventional, FHA, VA, generous friends, whatever). The owner has no role in the financing other than contributing/returning the escrow you paid.

6. If you do not complete the deal because you a) don't want the house, b) decide it's too expensive compared to similar houses, or c) can't get financing, the owner retains all the escrow you paid.

This is almost always a great deal for the owner for the following reasons:

1. The owner is not crediting you with the full difference between market-driven rents and the amount he's charging you. If market rent is $1,000, and he's charging you $1,500, only about $300 is going to your escrow. The rest goes to the owner.

2. Let's say the current appraised value of the house is $100,000, and the owner contends that, in 2 years, the house will appraise for $110,000, assuming no sweat equity at all. He says he'll split the difference with you. You can buy the house in 2014 at its 2013 price of, say, $105,000. Of course, the owner is always going to be very optimistic in his projections about the future value of the house, economic realities notwithstanding.

3. He doesn't really care if you eventually buy the house or not. If you do. he gets what's likely an inflated price, plus all the extra rent he's collected over the past 2 years. He may even avoid paying a Realtor--not sure on that one. If you don't, he pockets the extra rent AND the escrow, AND he gets a better house because of the sweat equity you've invested.

You'd be far better off to save the full $500 per month (the difference between market rent and what you can actually afford) and save a down payment that you can make on ANY house that happens to be for sale.

The only time this deal makes sense is if the market is booming and if you believe that the price surge is sustainable. In such a situation, you might lock down a better price than you'd pay 2 years from now. But clearly, that is not the situation now.

I'd stay far away. ...

[UpmyscoreinFL]

Yeah thinking might just be better off finding a nice rental house and then just offer to buy it once I can secure a loan. The market isn't going anywhere and maybe I can still avoid moving twice.

[Anonymous]

Here are some steps you can follow to get a good deal when you buy, rent to own:

• 1. Ensure the owner of the home is current on their mortgage before you buy and not about to be foreclosed on. This can be done by getting "Bank Authorization" from the home owners on Title and doing a simple check to see that the mortgage is current.
• 2. Get "Bank Authorization" from the owner allowing you to ensure that each of your payments actually go towards the mortgage payments each month. This way you can control where your hard-earned money goes each month, ensuring that it is applied to the mortgage, so as to not worry that you'll ever be foreclosed on.
• 3. Get everything in writing. All conversations and verbal agreements need to be written down and agreed to by all parties to the contracts.
• 4. Once you've signed the Assignment of the Lease-Option Contracts, take your signed contracts to the county recorder's office and record what you've signed. This places what is called a "Cloud in the Title" declaring to the world that you, and only you, can both lease and buy the home you've bought, "Rent-to-Own."
• 5. Request that your Option fee and Option assignment fee be assignable, sell-able, transferable, meaning, that you at a later date, can assign your Option rights to some one else to get your Option down payment back.
• 6. Seek competent legal advice from a *real estate attorney.* Real estate attorneys can no doubt be expensive, but it's always recommended. We have nothing to hide and are more than happy to provide your *real estate* attorney with all contracts before you sign them.
• 7. If the company you buy from won't allow these things...run.

Helpful links before you buy:

• HousingPredictor.com Use this site to get a feel for how your market is trending as far as home prices.
• RentOMeter.com Use this site when determining a fair market rental price to pay

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