Rent to own in Colorado Springs. What does this really mean? Well in this market is it smart to rent a house with the intent to purchase it in the future? In a depreciating market it depends on the terms. With record low interest rates can you wait and pray that they will be close to where they are today 12 months from now?
Typically what happens in a rent to own scenario, the renters rent the home with the intent of buying the home in 12-24 months. This allows the buyers time to correct any credit issues that are preventing them from obtaining a loan today. This is often due to their credit score or a recent bankruptcy.
Qualified sellers for rent to own properties are usually in a position where they don't have to sell. They typically have significant equity in the home, so renting is a good option for them where they have positive cash flow. This allows them to finance another home, either for up sizing or down sizing.
When looking at rent to own properties, the buyer will hire a buyer's agent to show them the properties. For Colorado Springs MLS, rent to own is not a field in the MLS, so it would have to be identified in the comment section for agents. Another option is for the buyer's agent to ask the listing agent if this is an option for the seller. Buyers need to be pre-qualified by a lender or have talked with the seller's preferred lender to ensure they will be able to qualify to buy at some time in the future.
The buyers need to be prepared to sign a rental agreement with a deposit. This deposit is usually more than your normal rental deposit because it is applied toward the future down payment (or earnest money) on the home. It may be non-refundable to discourage the buyer from backing out of the deal. If the buyer misses payments, then they revert to a renter status, depending on the frequency, they may forfeit their deposit/earnest money. If they fail to make monthly payments they can be evicted with the rental agreement.
The purchase agreement is negotiated at the time the property is rented and signed by all parties (after the rental agreement) including the listing and buyer's agents. The purchase price and purchase date are identified in the purchase agreement. If the buyer is not able to purchase the property by the purchase date, then either an extension is signed by all parties or the buyer is in default and loses their deposit/earnest money.
When a renter decides to rent to own, the seller can agree to apply a small portion of the monthly payment toward the down payment of the home. If this is done, it needs to be properly documented and tracked closely by both the buyer and seller. The seller may ask the buyer to maintain the property as if they are the owner during the rental period. Such responsibilities need to be properly documented in the rental agreement as well. The seller is still responsible for maintaining insurance on the property, while the buyer carries renter's insurance.
Usually the purchase price for rent to own is negotiated at the time the house is rented. In an appreciating market this is a good deal for the buyer because it locks in the price of the home and they end up buying the home at below market value. But in a depreciating market, it is better for the buyer to negotiate the price prior to closing, which is verified by a lender's appraisal.
Key points for rent to own: (1) There should always be a rental agreement; (2) Deposit up front that is more than your normal renters deposit and may be non-refundable; (3) Purchase agreement negotiated at the time the property is rented with the purchase price agreed to but adjustable to account for a depreciating market; (4) Purchase agreement is a contract and failure to execute means that the buyer is in default and could result in losing their earnest money. (5) a portion of the monthly rent may be applied toward the deposit/earnest money. (6) Buyer and seller should agree up front who will be responsible for what items for repairs and maintenance.
We found that "rent to own" is not a popular option in Colorado Springs for a number of reasons. It requires that the seller become a property manager for the period from when the buyers rent the property until they actually close; The buyers realize that the risk is shared and they may lose their deposit/earnest money if they back out of the transaction; Few sellers can actually afford to carry more than one home at a time; Listing agents don't understand the mechanics of the transaction and are reluctant to approach their seller about this option out of fear of not getting paid; Buyer's agents don't know how to negotiate a "rent to own" transaction because it is not a common practice and because they prefer to get paid sooner than later and if their buyer backs out of the transaction, they don't get paid at all.
With that being said, rent to own may become a popular option in the near future to help buyers who at one time, were down on their luck and need a little extra time to improve their chances for obtaining a loan, but would like to rent in a better neighborhood and not uproot their family when they can qualify to purchase a home.
For more information on how to list or purchase a rent to own property in Colorado Springs, contact Nancy Murray at 719-964-4810.