Rent-To-Own: December 2008

Tuesday, December 23, 2008

Using A Rent-To-Own Strategy In A Down Real Estate Market

06-19-08

Is there a way to make money in a real estate recession? You bet. Consider buying foreclosures and offering them on a rent-to-own policy.

There are more foreclosures on the market today than ever before. We used to only see foreclosures in blighted areas, but now they are everywhere - even in upscale residential neighborhoods.

There truly has never been a better time to purchase foreclosures than right now. Because the interest rates are so low and there are so many homes on the market, the savvy investor can get some real bargains.

Before purchasing any piece of property, it is always important to know your market. Make sure that the property is not in an area that has been blighted. Although it may be tempting to purchase a home for a few thousand dollars in a blighted area, but it is a poor investment. Not only will you have a difficult time trying to sell the home, but you will also have a tough time getting renters who will pay you on time.

If you purchase a foreclosure in a solid area, you should be able to find people who are interested in owning a home but simply don't have the down payment they need yet. These people are perfect candidates for the rent-to-own option.

This option allows the buyer to move into the home immediately with a down payment that is a fraction of the 20% down payment required for a conventional home loan. Each month, a portion of their rent goes toward the eventual purchase of the home. The lease period (usually two years) gives them time to acquire the financing needed to eventually purchase the home and repair their credit, if necessary.

Once you reach the end of the lease agreement, there are several possible scenarios. If the renter complies with the terms of the agreement, they have the option to purchase the home for the agreed upon price. If they do, you have made your money off of your investment and the renter is now a homeowner. If they choose not to purchase the home (maybe they found another home they like better, etc.) or if they break the lease for some reason, you get to keep all of the rent credit money they have built up and they get to walk away. If the renter still wants to purchase the home but they are not yet able to do so financially, then you may choose to either extend the term of the rent-to-own agreement or sell/rent the home to someone else.

One of the most frequently voiced downsides to renting homes is that tenants often do not take care of the property. In the rent-to-own scenario, however, tenants are more likely to take care of the property because they intend to eventually own it. You are also more likely to have tenants who make their payments on time in this scenario because: (a) they don't want to be in violation of the agreement and risk forfeiting the rent credit money they have accumulated, and (b) they want to be able to secure the best interest rate possible when obtaining their future home loan.

The bottom line is that whether you sell the home or not, you still make money on it using the rent-to-own strategy.

Mark E. Moebius
CEO of MILJONAIR Development
3451 St. Albans Road
St. Albans MO 63073

636-300-9000

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Rent-To-Own Homes: A Great Tool For Credit Repair

06-19-08

If bad credit is keeping you from being able to buy a home, you might want to consider the rent-to-own option. (You may have also heard this referred to as a lease with the option to buy.) This strategy enables you to repair your credit while gradually phasing into home ownership.

Here's how it works. First of all, the down payment is much smaller and more likely to be within your financial reach. Instead of the 20% usually required for traditional mortgages, the typical down payment for a rent-to-own home is only 2% of the purchase price.

Instead of buying the home outright, you sign an agreement with the seller to rent/lease the home for a period of time. During this time, you pay rent just like a regular tenant would. The difference is that instead of just paying rent, around half of your payment each month will be credited toward the eventual purchase of the home. Then as you make timely payments throughout the term of the lease, you will actually be repairing your credit while reducing the eventual amount you need to finance in order to purchase the home. (The typical lease period is around two years, but the length of the lease can sometimes be negotiated to even 3-4 years if you need that much time to regroup financially.)

At the end of the lease term, you have the option to either move forward on the purchase of the home you have been renting or walk away and find another home. If you decide to purchase the home, the rent credit you have built up will be applied to the purchase price that was set at the beginning of the lease. (Even if the value of the home has increased during the lease period, the seller cannot charge you more for the home than you originally agreed to.) If you decide to purchase a different home for some reason (you found something else you like at a better price, for example), you will forfeit all of the rent credit money you have accumulated (to compensate the seller for having the house off of the market for the leasing term), but you will be able to walk away without further obligation.

Obviously, the best way to purchase a home is by going the traditional mortgage route. The rents for rent-to-own homes do tend to be high. But if you currently have bad credit and can't get approved for a home loan, a rent-to-own arrangement may be your next best option. At least you will be getting something in return for your rent payments, unlike paying apartment rent. It really can be a great way to improve your financial stability and put you well on the way to home ownership at the same time!

Having Trouble Selling? Consider The Rent-To-Own Option

06-19-08

The current real estate market certainly presents its share of problems for sellers. A lot of properties are listed, some have been on the market for a long time, and homeowners are frustrated about not being able to sell their homes as quickly as they would like.

If you're one of those frustrated sellers, you may want to consider the rent-to-own option. It can be an excellent way for a seller to make money. On the front end, you will be able to receive a down payment from the prospective buyer. You will also receive a certain amount of money in the form of rent every single month. And finally, when the property is purchased, you will receive the remainder of the purchase price.

In a rent-to-own contract, the buyer is called the tenant/buyer. This is because at the beginning of the agreement, they are a tenant; when the lease ends, they have the option to become a buyer. Most tenant/buyers are individuals with not-so-good credit or people who for some other reason are unable to qualify for a mortgage loan. With the help of this rent-to-own option, these individuals can repair their credit and prepare for the responsibility of buying a house at the same time.

The rent-to-own option usually involves two separate agreements. The first one is a standard rental agreement in which the tenant/buyer agrees to make rent payments at designated intervals for a certain length of time. The second one is actually an option-to-purchase contract, which also usually has two parts. The first part requires the tenant/buyer to pay a non-refundable down payment of 2-5% of the price of the property. (This money is similar to a security deposit and takes that home's listing off the market.) This part then paves the way for the second part, which gives the tenant/buyer the exclusive right to purchase the property. If they decide to buy at the end of the lease agreement, the tenant/buyer can then obtain a mortgage loan and purchase the house from the seller at the price originally agreed upon. If they choose not to buy, they are free to do so, but they will forfeit to the seller all of the rent credit money they have paid (as compensation to the seller for having the home off the market during the lease period).

Before you proceed with this option, you will want to make sure you understand your state's laws as they apply to rental agreements. Some states tend to favor the renter and some tend to favor the landlord. You need to know where you stand before deciding whether or not this option is right for you.

Overall, the rent-to-own option is a win-win for everyone. It helps a financially-challenged buyer get into a house almost immediately, and it provides the seller with a steady income for several years while the tenant/buyer shores up their financial position to eventually finalize the purchase.

Rent-To-Own: The Basics

06-19-08

The most common method of buying a house in this country requires the buyer to have a good credit rating so that he can apply for a loan. The buyer is then required to pay about 20% of the total price of the property in the form of a down payment.

The sad part is that most of the buyers in this country do not have a good credit rating. And even if they do, they still may be unable to come up with the down payment. The rent-to-own option, however, allows them to obtain a home without having to come up with the down payment first, regardless of their credit rating.

Here's how it works. The tenant/buyer agrees to rent the house for a designated period of time. During this period, the tenant/buyer pays monthly rent, half of which is usually set aside in escrow towards the down payment of the property. In some cases, the amount may simply be deducted from the actual price of the property instead.

As long as the prospective buyer fulfills the lease requirements and rents the house for the designated time, their money will accumulate in escrow as agreed and be applied toward the purchase of the house. If the prospective buyer decides to break the lease and not rent the house for the designated period of time, they will forfeit all the money being held in escrow and it will all go to the seller instead.

There are usually special clauses in the contract to protect both the tenant/buyer and the seller during the lease period. For example, the seller cannot sell the property to someone else during the time the lease agreement is in place. Similarly, the tenant/buyer cannot take out a loan against the property, since they don't own it yet.

There are other features that make renting-to-own an attractive option to buyers. For one thing, the required down payment is usually only 2% instead of 20%. Besides that, the seller pays the annual taxes on the property since they still hold the title on it. In addition to that, the closing price of the property is agreed upon upfront by the buyer and seller and remains constant during the course of the lease, so the sale price isn't going to increase at the end of the lease, even if the property value increases.

Most rent-to-own contracts are handled directly between the buyer and the seller, but it's always good to proceed with caution. This kind of contract can be a bit tricky, so it's a good idea to have a real estate attorney look it over before you sign on the dotted line.

The rent-to-own option can definitely be a win-win arrangement for buyer and seller when conventional methods of financing are not available.

When Rent-To-Own Makes Sense

06-19-08

Why would someone want to enter into a rent-to-own agreement instead of buying a home through conventional means? Are there any situations where this option actually makes sense?

Yes! Someone might opt to rent-to-own for any of the following reasons:

Lower down payment. Instead of the typical 20% down payment required in the direct purchase of a home, the rent-to-own option usually only requires a 2% down payment. With the rising cost of today's homes, 2% is more likely to be within a potential buyer's reach than 20%. On a $100,000 home, for example, it's the difference between $2,000 and $20,000.

Bad credit OK. A bad credit rating can prevent someone from obtaining a home loan. At the very least, it will result in unfavorable interest rates that cause monthly mortgage payments to skyrocket. A rent-to-own arrangement is designed in such a way as to allow the tenant/buyer to repair their credit while making monthly payments that enable them to qualify for a home loan by the end of the lease period.

Bankruptcy OK. A bankruptcy is one of the worst things to have on your credit report. A person who has gone through a recent bankruptcy will find it nearly impossible for several years to obtain a loan of any kind for anything, much less a home. Depending on the circumstances, however, there may be sellers willing to offer a rent-to-own agreement to someone who has gone through bankruptcy.

Having trouble selling a home. In a down real estate market, a property may sit on the market for an extended period of time without any movement. A seller in this situation might choose to use the rent-to-own option to generate some income from their property until the market picks up again.

If you fall into any of these categories, you may to consider the rent-to-own option. It just might make perfect sense for you!

Rent-To-Own

Tuesday, December 23, 2008

Using A Rent-To-Own Strategy In A Down Real Estate Market

Rent-To-Own Homes: A Great Tool For Credit Repair

Having Trouble Selling? Consider The Rent-To-Own Option

Rent-To-Own: The Basics

When Rent-To-Own Makes Sense

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