with Lease-Option or “Rent-to-Own” deal
“Rent-to-Own” or “Lease with an Option to Buy” both sound like enticing ways to purchase a home in Las Vegas. But buyer beware. These deals are definitely not as simple and cheap as they may sound. And they have some potential risks.
What is “rent-to-own”?
First, a definition: a lease-option can be defined as an owner’s offer to lease his/her property to a renter/prospective buyer while giving the renter/prospective buyer an option to purchase the home at a specific date in the future. The eventual purchase price is written into the Lease-Option agreement. (“Rent-to-Own” is simply a different way to express the Lease Option method of home purchase. They are the same thing.)
Why the renter must pay a deposit
Typically, the renter/prospective buyer is required to make a substantial, non-refundable deposit on the property at the time the Lease-Option agreement is signed. For example, an owner may ask for $10,000 for the option and set a date of one year for the renter/prospective buyer to complete the purchase. During that one year period the renter/prospective buyer will have to make monthly rental payments.
Why the big deposit? The owners wants to be certain the renter/prospective buyer is serious. And the owner wants some financial protection during that period.
What risks and features you should look out for
Now this is where things become more complicated and risky–especially in today’s real estate market. Here is why:
1. The most awful thing that can happen is that the owner stops making mortgage payments during that year period and the house goes into foreclosure without telling the renter/prospective buyer. If the owner does not tell the prospective buyer and the property is foreclosed upon, the prospective buyer may be out of luck. By law, the owner no longer owns the foreclosed property–a bank does–and that former owner can no longer legally sell the home to the prospective buyer.
2. In a better scenario–with no foreclosure–if the renter/prospective buyer goes ahead with the purchase, the deposit may or may not be applied to the purchase of the home. And all or part of the rental payments may or may not be applied to the purchase. These items should be specified in the original Lease-Option agreement. Do not assume the deposit or monthly rental is part of a down payment.
3. At the end of the option time period, the comps or appraisals showing the value of the house may end up being lower–instead of higher–than the price specified in the Lease-Option agreement. Lenders may decide not to finance the sale. The purchase price may have to be renegotiated.
4. If the renter/prospective buyer decides not to take the option of buying the house at this point, the renter/prospective buyer will probably lose the deposit entirely. The renter will probably also have to move out of the home.
5. At the end of the option time period, banks may have changed their requirements for mortgage loans. They may require 20% to 40% down payment and a very, very high credit score. Or the U.S. economy may have tanked. Or the renter/buyer may be facing personal financial issues. Or–and this is the most common result–the renter/buyer changes his/her mind and opts out of the deal.
6. Be sure to have professional advice if you decide to enter into a Lease-Option or “rent-to-own” deal. Have a real estate attorney or reliable experienced real estate broker advise you and demand an explanation every single clause in the agreement–before you sign it.
7. And remember–everything in real estate is negotiable!
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