Buyer Beware - Use This 5 Point Checklist For Rent To Own Homes

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Real Estate Agent with Joe Manausa Real Estate 8508880888

If you are a regular reader reader of the Tallahassee Real Estate Blog, then you know that I am an advocate of using a lease purchase agreement (rent to own homes) and many other forms of creative financing for real estate. But just because that I advocate the use of this form for real estate acquisition does not mean that one can use it without careful due diligence.

Free list of homes available for home buyers with bad creditHome buyers need to understand some risks of buying “rent to own homes” through a lease purchase agreement, and how they can mitigate these risks. Just last night I received a comment from a reader who recently found this out. KC wrote:

Here is our situation, we moved to the Tallahassee Real Estate Market from out of State. We signed a lease purchase agreement on a 4 bedroom 2 bath home for three years. That way we could get established here in Florida and make sure that it was the right move for us. We love it here!!! We received a letter from the owner of the property three days ago that due to the economy they are filing for bankruptcy and that the property was already in a foreclosure.

We were shocked beyond belief. We are looking for a new home as we have pets that are like our children so we can’t do the rental thing and we don’t want to live in a house that we can’t buy. We basically have lost all the money we have invested in this home as some of the lease payment went toward the price of the house and we paid a big down payment…. -KC

As you can see, “KC” got into a bad situation and lost her investment. This is a risk in any rent to own program, so my recommendation is to follow some basic safety tips to avoid this happening to you.

Rent To Own Homes – 5 Point Buyer Checklist

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Rainmaker
778,056
Ron Marshall
Marshall Enterprises - Saint Michael, MN
Birdhouse Builder Extraordinaire

I know contract for deed and rent to own are becoming more and more popular since some folks can't get a new mortgage.  Good that you are up to date on how to protect your clients. 

Oct 26, 2010 08:48 AM #1
Rainmaker
805,415
Joe Manausa
Joe Manausa Real Estate - Tallahassee, FL
Tallahassee Real Estate

Thanks Ron, it's a sprint. We've done these for years without worrying about "qualifying" the seller... but times have changed.

Oct 26, 2010 08:51 AM #2
Rainmaker
239,325
Roger Johnson
CENTURY 21 American Homes - Hickory, NC
Realtor - Hickory NC Real Estate

Great point, Joe.  Lease purchases can be a sound strategy, but in this market, it's as important for the buyer to qualify the seller as it is for the seller to qualify the buyer

Oct 26, 2010 09:27 AM #3
Rainmaker
805,415
Joe Manausa
Joe Manausa Real Estate - Tallahassee, FL
Tallahassee Real Estate

Thanks Roger. Crazy isn't it? Who would have ever guessed we would be qualifying sellers...

Oct 26, 2010 09:36 AM #4
Rainmaker
177,334
Dan Rosenberger
Harvest Realty - Westfield, IN

Joe - I like your checklist.  With rent to own home, what happens if the "buyer" pays their higher-than-normal deposit and their higher-than-normal rent, but the home does not appraise for the purchase price in the contract?  With interest rates as low as they are now, an outright purchase or outright rental might make the most sense unless the renter/buyers are extremely careful.  (Many landlords will sell the home to a renter at a price close to the appraisal.)

Oct 26, 2010 09:47 AM #5
Rainmaker
805,415
Joe Manausa
Joe Manausa Real Estate - Tallahassee, FL
Tallahassee Real Estate

Thanks Dan. I would put the "higher than normal" portion into escrow. The appraisal situation needs to be addressed in the contract (and is usually normal language).

An "outright purchase" is most likely not an option for somebody who has chosen to take the lease-purchase road to home ownership. An "outright lease" gives them no future upside.

Oct 26, 2010 10:48 AM #6
Rainmaker
529,751
Kevin J. May
Florida Supreme Realty - Hobe Sound, FL
Serving the Treasure & Paradise Coasts of Florida

Joe, you beat me to it, but yes, a third-party escrow for down payment (if any) and rent credit towards the purchase is the only safe way to avoid this dilemma.   

Oct 26, 2010 12:26 PM #7
Rainmaker
805,415
Joe Manausa
Joe Manausa Real Estate - Tallahassee, FL
Tallahassee Real Estate

Agreed Kevin, but negotiation will inevitably rear its ugly head. Sellers might say "no dice" to escrow situation and buyer will have to decide how bad they want that particular home. Situations like this is where an experienced agent is worth their weight in gold.

Oct 26, 2010 12:29 PM #8
Rainmaker
391,266
Larry O'Sullivan
Rocky Mountain Realty, Sandy, UT - Sandy, UT
We get homes sold

Joe

I appreciate your writing about the negative aspects of rent to own as well a promoting the concept. Thanks for the balanced approach. All education on this subject is very helpful

Oct 26, 2010 03:50 PM #9
Rainmaker
805,415
Joe Manausa
Joe Manausa Real Estate - Tallahassee, FL
Tallahassee Real Estate

Thank you Larry. This is a common activity that I believe will soon be "not so common."

Oct 26, 2010 03:53 PM #10
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Rainmaker
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Joe Manausa

Tallahassee Real Estate
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