Do those 'rent to own' housing deals ever pay off?
If you've been in the U.S. recently, you've seen the signs, generally at large intersections: “Rent To Own! No Financing Necessary! Call Now!”
While these offerings are nowhere near as common on this side of the border, several small Canadian companies are using them to entice prospective homebuyers into the market.
Ottawa-based Rent 2 Own Canada, for instance, claims to help first-time buyers to work towards ownership without a huge investment. Same with Calgary's Rent Faster. And then there's a stack of offers on Craigslist as well.
But is this really the way to go if you're strapped for cash or have a shaky credit history? Or are the deals simply too lopsided?
Usually, the seller gives the tenant the right to buy the house at some point in the future, usually one to three years out, for a price that's agreed upon today, plus a fee that will keep the option of buying open.
So, if a home might normally rent for $1400/month, a rent-to-own tenant might pay $1600, a portion of which would be credited to the tenant for an eventual down payment, assuming they ever get that far. If not, expect to kiss the phantom 'equity' goodbye.
During the rental period, the landlord still owns the home and is legally responsible for it, but the renters are expected to maintain the property as their own.
If you're going this route, do the numbers a couple of times. Make sure that the owner provides you with a title showing that they have full and total authority over the property, and can actually to sell it to you, warns broker Canadian Mortgages. And make sure you see mortgage paperwork every single month that you live in the home.
This way, you can be sure that the mortgage is getting paid, you won't be evicted in the meantime and the place will still be there when it comes time for you to own it.
Have you been involved in a 'rent-to-own' arrangement? How are things working out? Do you know any tenants who've actually came out ahead?
By Gordon Powers, MSN Money
Posted by: Mike | Sep 30, 2021 12:44:59 PM
The rent to own system is terrible for the tenant, and huge for the landlord! The author should have done a bit more research prior to writing this.
Landlord Pros:
-Will institute penalties for any late payments-usually the initial upfront payment ($4000-5000) plus any additional equity built up for the down payment is sacrificed if the tenant does anything wrong
-Gets to set a guaranteed purchase price that is usually quite rosy 3 years into the future
-Tenant cares for all of the non-major maintenance and usually ends up performing most of the work himself
Landlord Cons:
-If there is an astronomical increase in housing prices, he may not make "as much" money as he did with the rent to own system
Tenant Pros:
-The reality is that there is none whatsover...the often cited pros are:
1) That the tenant can get into a purchase agreement which will give them 3 years to clean up their credit if they were unable to qualify for a mortgage at that moment...but why not rent at the lower cost for three years and do it as well?
2) Tenant gets to build equity for a "down payment" while they are living in the unit. The reality is that it is not a down payment whatsoever...it is a credit towards the future purchase price...they still have to save the downpayment for the bank, and if they don't...they lose all of the equity they had built up. Furhthermore, the fact that they are paying an inflated rent price means that it is more difficult to save the real down payment for the bank, making it even more likely the landlord will win. Why not rent at the lower price, save up a real down payment with all of your money, clean your credit, and in three years when you are ready to purchase you will be able to shop multiple properties, not be forced into one property that you have already spent a considerable amount of money on!
Landlords that use the rent to own strategy are taking advantage of uninformed renters.
Posted by: Q | Sep 30, 2021 1:13:10 PM
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Posted by: Gordo Mac | Sep 30, 2021 4:27:25 PM
I heard that teflon is in a world wide shortage. How does a person invest in this and where.
Posted by: Not for me | Sep 30, 2021 11:15:48 PM
Don't really see where the tenant benefits at all. Save up the money yourself. If you can't then buying not likely a viable option for you anyway.
Posted by: Chris | Oct 1, 2021 12:12:37 AM
Renting to own is not a good idea. If one cannot afford a down payment now, it will be just as hard in the future. There is no shame in just renting. I found a beautiful house that one of the companies in the article had on their website. They did want me to rent to own, and I told them they could write a straight up 1 year lease, and then I would consider a conventional mortgage at that time.
After doing a little home work, I found exactly what Mike said to be true. Avoid renting to own.
Posted by: Maggie | Oct 1, 2021 5:23:07 AM
Not everyone is disciplined enough to save up for a down payment and this is a good option for those who can't. I have a friend who has done a few rent to owns and they are a win win for the landlord and tennant. Many people have poor credit for many reasons (divorce, health, student loans etc) but make a descent wage, they just have poor credit. But if they can repair it in 3 years why not work towards home ownership now. Why wait or waste another 3 years. The landlord you want to work with is the one who sees this as an exit strategy, not a rip off a poor guy when he's down strategy. The landlord should hook up the tennant with a credit repair specialist and a mortgage broker to help him repair his credit and qualify for a mortgage when the three years (or whatever is agreed upon) is up. Of course a tennant(s) that makes 80g's a year can't buy a 500g house. There is a formula based on income and expenses as to what you can reallistically afford. He treats tennants fair and wants them to buy the house at the end of the term and once he knows what they will be able to afford they basically get to choose the house they want. He buys the house they eventually want to own not some house nobody wants. The benefit to the landlord is you have an agreed price, say 270g's plus the agreed upon expexted market increase per year. Say it's 3% a year. By the end of the first year the house increases to 281g's by the second year another 3% and the 3rd year another 3%. I think that it's decided what is a fair increase based on the market. So the landlord knows when he will sell, how much it will appreciate, and some principle paid down and the tennant repairs his/her credit, picks the house they can afford, has a house they can treat as their own and not worry about getting evicted or the house they are renting is getting put up for sale. It sounds pretty good and fair for both parties when done with a reputable landlord. Due diligence is required by both parties involved.
Posted by: Malcolm | Oct 1, 2021 9:20:21 AM
Maggie has hit it right on the head, everything she says is 100% correct.
For all the other comments that people have posted, either you just don't understand the concept or you have dealt with the wrong organization that offer's rent to own.
Yes there is alot of bad rent to own programs out there, gee like the one's that say zero down payment.
Posted by: DianeA33 | Oct 3, 2021 9:01:50 AM
I bought a rent to own house but inthe 70's. People were honest then, out to help the next person if they could.That's the way I bought my first house. I paid him an affordable rent for a year, and, he then turned around, and, wrote me a document that said I had paid him that amount as a down (retainer fee) payment on the amount owed. I then went to the bank, and presented that document to the manager of loans, and they ran the paperwork up, made an appointment with the notary, and, the owner and finalized the whole thing in due course of time. After that procedure, the house was in my name, and, WOW. I was a new homeowner... I don't think people are up to doing this anymore, money $$$ being the only object on their mind. Too bad because it did give a chance to the buyer and also a chance to the seller, who if they had an elephant on their hands could finally get rid if it or if they were honest people, they had given a chance to an honest and hard working person the chance to go forward in life. Too bad, people don't think that way anymore. They want their money right up front and will do anything for it...
Loyalty and honesty don't pait up anymore or so it seems. Wven if ine has good credit, it's very difficult to go the tight way anymore... I hope that mode of purchase comes back in style one day, then maybe there will be more sales made and less foreclosures in the way... Good luck to the small people and honest people...'
Posted by: cuckholddon | Oct 3, 2021 11:10:04 AM
Maggi-malcom&Diane appear to understand this process!
I can say this because I Didn't care for the problems of being a regular landlord& "sold" a # of homes like this!
You know what, I still feel good about it & the(temporarry tenants) do to!
The "Complainers are the ones who were not responsible enough to complete the deal--The responsible ones ended up owning homes!(Simple as that)!
Posted by: Neil | Oct 3, 2021 4:17:15 PM
Unfortunately there are plenty of companies doing rent-to-owns that probably give many of the good companies a bad name. I have heard plenty of horror stories over the last couple of years about rent-to-own deals that have gone south but I have also seen many success stories. Reputable rent-to-own companies will take the time to explain the process in full to their tenant-buyers, they will actually meet them in person without pressuring them and should never take money up front. I do agree with the original post that if you are considering a rent-to-own, you should definitely be sure you are part of the initial purchase of the property (in fact you should pick the property) or if that is not possible, be sure to see the mortgage title to prove that the person who is renting-to-own the property to you actually has ownership of the property. On top of ensuring who the owner is, ask the rent-to-own company or individual for references. A reputable company would be happy to have you speak to current tenant-buyers or their network of licensed realtors and mortgage brokers.
There are many companies that structure their rent-to-owns in the WIN WIN format. Do your research and align yourself with a company that truly wants to help everyone involved in the deal.
Posted by: Bob | Oct 3, 2021 4:33:31 PM
Leasing to own a home can work well if the agreement is between the buyer and the individual home owner (seller) and both parties are acting in good faith.
I'd be leery of dealing with a lease or rent to own a home company as at least some seem to set up purchase agreements in a way that almost guarantees the home will revert back to them, along with any down-payment, option fees, etc. paid by the prospective buyer, at the end of the agreement due to the purchaser being unable to get a conventional mortgage for the agreed upon sale price of the property.
Posted by: Bob | Oct 3, 2021 4:47:45 PM
Lease or rent to own works best for sellers who need to sell their home quickly but are in a slower real estate market. One advantage is that the seller can avoid using a real estate agent and in doing so will not have to pay any commission on the sale of their home. Another advantage is broadening the market for your home to include buyers who may not have been able to save the full down payment required to obtain a conventional mortgage.
Posted by: Tom | Oct 3, 2021 4:57:58 PM
WHAT PEOPLE HAVE NO IDEA IS THAT WHEN DOWN THE ROAD YOU HAVE DEBT ON CREDIT CARDS YOU CANNOT USE YOUR HOME AS A LINE OF EQUITY TILL ITS PAID OF I DO BELEIVE THE TITLE OF THE HOME ISNT YOURS TILL THE ACTUAL LAST PAYMENT IS DONE...
LOOK AT MY SITE FOR SECRETS ...ON BANKS
Posted by: Bruce | Oct 3, 2021 5:49:48 PM
Rent to own deals are a win/win for all concerned if structured properly. Advantages for both parties over the traditional tenant/ landlord relationship. What often gets overlooked is that the tenant eventually needs to qualify for a mortgage on a property that is properly priced. Address those issues and everyone wins.
Posted by: FlatFee495.com | Oct 3, 2021 5:50:49 PM
works only for buyers, sellers are trying to save their losses...
Posted by: Neil | Oct 3, 2021 6:01:16 PM
Be very leery of dealing with individual homeowners trying to rent-to-own their homes. First of all, there have been many instances where "renters" misrepresented themselves as the home owner and tried to do a rent-to-own on a home they did not own. Secondly, the paperwork and terms are usually very loose which can work against the tenant-buyer if there is any default of payment etc. With a rent-to-own company, you can take much of the above risk out of the equation.
Posted by: Raymond | Oct 3, 2021 7:37:36 PM
I'd like someone to do the math for me. Where is the profit from the seller's point of view?
Posted by: Neil | Oct 3, 2021 10:32:38 PM
Seller gets profit in a few ways:
1. Appreciation on the property
2. Pay down of the mortgage
3. Initial down payment (although counted towards the purchase of the house, still can help the seller offset costs but generally acts as an insurance policy against the tenant-buyer walking away)
Posted by: Andrew | Oct 3, 2021 10:51:59 PM
"Where is the profit from the seller's point of view? "
Depends om the seller's circumstances.
In a "hot" real estate market, a seller is better off using a straight "for sale by owner".
In a slower market where there may be hundreds of competing properties, the seller's "profit" may come down to the ability to sell their home rather than losing it or having it sit on the market unsold for a lengthy period of time with a real estate agent constantly pushing them to lower their asking price.
In a slower real estate market, a properly executed lease to own agreement between a home owner and home buyer can be beneficial to both, with the home owner being able to sell their home ... perhaps at a better price than than a straight for sale by owner and without the wasted cost of a real estate agent commission ... and the home buyer being able to purchase a home earlier than might otherwise be the case.
Many "rent to own a home" companies are basically scams in which the company "profit" comes from setting up an agreement which the prospective buyer isn't likely to be able to meet, in which case the property and all amounts paid by the buyer revert back to the "rent to own a home" company.
Posted by: Mike | Oct 4, 2021 1:13:52 AM
My initial comment stands.
I am not a tenant that got screwed...I am a landlord that extensively researched the concept and eventually realized that this is not a good deal for the tenant whatsoever. If anyone wants to dispute my original post point for point, please be my guest.