Rent-to-own your home: Pros and cons

It’s tough for buyers to find financing and hard for sellers to find buyers. A solution that can work well for both is renting with an option to buy.

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These deals, also called rent-to-own and lease-option, usually require buyers to pay extra rents each month plus up-front fees of about 5% of the purchase price. The regular rent then goes in owner’s pocket (presumably to pay the mortgage), but the additional payments are used to buy down the price of the home.

“Lease option agreements, if properly drafted, by and large are an effective way of enabling people to buy who are having trouble arranging financing or coming up with down payments,” said Lawrence Jacobson, a real estate attorney in Los Angeles.

The Advantages

Because the contract is typically written to close in 12 to 36 months, it gives buyers the chance to experience homes and neighborhoods without having to make major commitments.

But the biggest reasons buyers opt for rent-to-buy deals are to build up down payments and to improve their credit profiles so obtaining a mortgage is easier.

For example, if they buy a $200,000 home, paying $5,000 up-front and a rent premium of $400 a month on top of their $1,000 market rent, they’ll have $9,800 saved after one year and $19,400 after three.

Read more advantages…

The Drawbacks

But there are drawbacks to these deals. You need a good contract and a healthy sense of “buyer besmeared.”

Losing your investment: For one, there’s little protection for buyers who fall behind in payments. If you fall behind and are evicted, you lose any up-front fees and rent premiums you paid.

Can’t get a loan: If you still can’t arrange financing at the end of the rental period, you may have to forfeit all the extra cash you’ve invested. The terms for that scenario would need to be spelled out in the contract. In buyers’ markets, you may have the leverage to get a contingency clause specifying any up-front fees and extra rent be returned if you don’t qualify for a loan.

Read more Drawbacks…

Original article by Les Christie, CNNMoney.com staff writer

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