Good people often run into financial difficulty because of divorce, sickness, or many other reasons. Usually, people with temporarily challenged credit will have difficulty getting a mortgage or will be asked to pay ridiculously high interest rates by the typical lender. It can be embarrassing for someone with recent financial problems who is used to being treated well.
Almost everyone qualifies for a typical rent to own scenario because the owners do not necessarily perform a credit check. They may ask for rental references. You are the typical rent to owner if you have:
· Temporarily challenged credit
· Some down payment
· Verifiable income and steady employment
· A desire to own a home (again)
· A willingness to “pay someone to borrow their credit” until your credit improves
A rent to own agreement is really two contracts. A lease agreement with special terms and conditions, and an option to buy at a future price and before a future date. Usually the option is the most complicated part of the agreement for most people. Legal advice is recommended.
Typical Lease Terms
· Tenants perform all repairs under $1,000 (sometimes this is negotiable).
· Tenant is expected to perform regular maintenance items like cutting the grass, cleaning the windows, etc.
· Tenants pay for all utilities, phone and cable
· Lease amounts typically include taxes and insurance. Contents insurance is usually optional and the tenant pays.
· Tenant is responsible for any damage they do to the property.
· 1st and last lease payments are usually required up front
· The tenant almost always pays more than market rent for the lease and part of the extra amount usually gets applied to the purchase.
· The tenant can be removed fairly quickly if they default on their lease payments
· Its important make sure you do a walkthrough with the owner before you decide and make a list of any deficiencies or repairs that need to be dealt with and who will be responsible for them.
Typical Options Terms
· An option gives you the right to buy a property at a future price and any time before a future date. There are fees for this privilege. Typically the option price is 2-5% of the purchase price.
· Expires after a period of time, usually 1-3 years is common
· The option amount is non-refundable if the tenant chooses not to buy.
· The option amount is usually applied as a down payment on purchase.
· The purchase price is usually inflated above current market value to compensate the current owner for market risk and can depend on the amount of time the tenant thinks it will take to repair their credit.
· Usually the tenant pays the legal fees to set up the lease-option agreement.
Some Ideas
· Sometimes a tenant can get a property that is in rough shape for a low option price and fix it up to improve its value. If the option is set up properly then the tenant may realize most or all of this benefit.
· The tenant will “control” the property while the option is in force, effectively preventing the current owner from selling it without the tenant’s permission. Most options will expire immediately on default of the lease payments.
· A smart tenant can negotiate a clause to the option agreement for an increase in the option price and time, with no penalties, if they need more time to repair their credit.
· A tenant can negotiate a Vendor Take Back (VTB) as part of the option agreement to avoid high ratio mortgage insurance fees on exercise.
· If you are in a situation where you are thinking of not executing the option, try negotiating with the owner for a partial refund. If you have taken care of the property and down some great work to it, the owner may be willing to give you some of your money back.
· If you have to leave the property for a little while, see if the owner is willing to let you sub-lease it to a friend without terminating the contract.
Why would an owner do this?
· For profit of course. The owner will make money on the lease and on the sale. If you default at any time, some of the amounts you have given them are usually non-refundable.
· The tenant will take good care of the property because after all, it will be theirs one day.
· The chattels inside the property are considered as is, and therefore things like the appliances are considered the responsibility of the tenant, not the owner.
· An owner will have less management responsibilities like cutting the grass and minor repairs.
· Most people do not exercise their option to buy and “move on” forfeiting their deposit and extra payments. The owner can make more money this way, with less risk, than with a standard lease.
Watch Out!
· There are owners out there who actually hope that you will default so they can lease option the property again and again.
· Predatory practices like these are illegal but hard to prove in court. Most tenants do not have the resources to fight.
· If the current owner stops paying the mortgage or defaults on his taxes, you could be in trouble. You must consult with a lawyer.
· Visit a credit counselling agency early and consider their recommendations. You don’t want to forfeit your deposit because you put this off. Try and find a non-profit in your area. They charge lower fees and sometimes ask for a donation instead of fees.
· If you have not completed your credit repair, but qualify for a higher mortgage rate, consider a 1 year term and then renegotiate a better rate on your mortgage later.
· If the property goes up significantly because of market conditions or repairs you have done, and you have properly negotiated your contract so that you benefit from the increase, consider selling and simultaneously executing your option. You may make some extra money making it easier to buy another home.
