Saturday, August 22, 2015

The Myth of Rent To Own

At least three times a week we get a call, email or social media post asking about "rent to own" properties.  This is understable since most people want the American Dream of home ownership, but not everybody is ready to be a home owner. 

Here are a few things to know about rent to own:

1. Rent To Own Properties are very rare.  Right now out of 3101 active listings in the Montgomery MLS, only 53 (or 1.7%) are advertised with Lease Purchase or Owner Financing as acceptable terms. Of the 4214 residential properties sold in the past year, 52 (1.4%) were owner financed in some form. 
2. Sellers who sell, sell. Owners that lease, lease. It may sound simple, but most people that place their house on the market want to move on. For the most part sellers who offer owner financing, lease purchase or any other type of creative financing are investors who are looking for maximum return on their investment. This goal does not favor a buyer's goal of low down payment and low interest rates. 
3. Many properties sold with seller financing  or lease/purchase do not qualify for any other type of financing. One of the reasons that investors sell using owner financing or lease purchase is that they know the price or condition of the property does not allow for accepted appraisal standards. Offering to carry the note  allows the seller to get the highest price with minimal work, thus increasing the return.
4. The buyer has no negotiating power. If the seller is the bank, they will set the price, terms and conditions of sale. Due to the limited supply and relatively high demand, the seller can choose the buyer and set the terms of sale that are most favorable to them. 
5. The terms of sale will not be favorable to the buyer.  The buyer should expect to pay exceptionally high interest rates, high down payments, non refundable deposits, short loan terms and in many cases a balloon payment. The buyer may even find themselves owing more on the property than it is worth. 
6. The buyer doesn't own anything. Most "rent to own"  or owner financed properties are financed with an instrument known as a Bond For Title or Contract For Deed.  The buyer does not receive ownership of the property until it is paid in full, in contrast,  a mortgage creates a lien on the property, but the buyer has ownership and a deed to the property. Generally, if a payment is late or not paid, the seller (note holder) can at their option convert all previous payments to rent and evict the tenant. One late payment could erase all of the equity the buyer may have in the property. 

In today's market, interest rates are still at historical lows, there are many financing options offering little or no down payments and buyer's are protected from overpaying for a property by appraisals. Given the risks involved in any sort of Lease/Purchase or other owner financing makes this option far less palatable than standard mortgages. There are very specific instances that make owner financing attractive to a buyer, these are extremely rare. 
If you eventually want to buy, but are not ready yet, save some money for a down payment, repair any credit issues and talk with a lender and Realtor about financing options. 

Ready to Buy or Sell? Contact Bo Evans Realty to find out how. 334-361-4661.or visit our web site

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