These rent-to-own scenarios can work for some people who don’t qualify for financing by allowing them to save up money for a down payment or work on improving their credit.
But it’s not for everyone.
Read Misty Williams' blog, From the Ground Up
“The people who have horrendous credit and just don’t pay the bills just aren’t ever going to get a mortgage,” said Jeff Gross, owner of Gilbert-based Arizona Rent to Own.
In the past year, Gross said he’s seen business increase 50 percent. He added that about 50 percent of his deals end with the renter buying the property.
But experts say the majority of tenants who enter into a rent-to-own agreement never purchase the home — in many cases, because they haven’t managed to repair their credit in time.
The right way to do it is to get a lender involved at the beginning of the process to see if buying the home is feasible, said Debbie Norton, a Valley real estate agent who specializes in property management.
“How much are payments going to be today, and can they qualify for it in a year?” Norton said. “Interest rates can go up. Situations change.”
Potential renters and property owners need to consider several things before jumping into a rent-to-own agreement, experts say.
Entering a contract is more expensive than a typical rental agreement.
Property owners often require an upfront fee, sometimes thousands of dollars, just for the option to buy. Rents are higher too, though a portion is typically applied to the purchase of the home. The upfront fee can also be applied to the purchase.
Tenants are also expected to pay for a portion of the home’s maintenance, unlike a typical renter.
One problem a tenant needs to check for, especially in today’s market, is if the house is in foreclosure, Norton said. He or she also needs to make sure the person trying to sell the home actually owns it, she said.
Some unscrupulous owners never intend to sell the home, said property manager Tom Loegering, a 40-year veteran of the business.
“You must work with somebody you know is ethical,” Loegering said.
If a renter still can’t purchase the house when the contract is up in two or three years, then the owner gets the house back and just moves on, he said.
A potential tenant should ask for referrals, check to see if the owner takes care of the property and ask a lot of questions, Gross said.
Working with a real estate agent or an attorney can also be good for someone who has never owned a home to make sure what’s being offered is a good deal, he said.
With the market slowdown, now is a good time to negotiate on rent and lock in a good purchase price, Gross added.
Rent-to-own can also be good for owners in a number of ways.
They often have fewer hassles with the tenants, who take better care of the property because they’re invested in buying, Gross said.
“A lot of times people put in significant repairs,” he said. “The tenant’s basically sharing in some of the responsibility of the property.”
It’s often easier to collect rent, and when it’s time to sell, the owner doesn’t have to pay commissions to real estate agents, he said.
On the flip side, owners also need to be wary.
They still need to do credit and background checks to see who they’re dealing with, Norton said.
Owners also need to consider that the property will be tied up, unable to be sold, during the lease period. And it’s harder to evict problem tenants than in an average rental situation, Norton said.
“This isn’t something just to jump into,” she said. “They really need to go to an expert.”
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