Rent-To-Buy Pros And Cons

Rent-To-Buy Pros And Cons

Reluctant would-be homeowners must do their homework before agreeing to build equity by renting.

In Depth: Rent-To-Buy Pros And Cons As home prices continue to drop, consumers are taking a harder look at rent-to-buy options, in which potential homeowners commit to a multi-year lease with a future option to buy the property.

In other words, it's nice to have an out. If property values plummet, the renter can remain a renter until the agreement expires. Should values rise, then the rental payments count toward a purchase of the home within the agreed-upon time period.

Here's how it works: Instead of outright purchasing a property, a potential buyer draws up a contract with a seller in which the monthly rental payments, based on the home's value and often above going rates, count toward an eventual sale. All rental payments made pay down the principle if the renter decides to exercise the pre-paid option--typically 1% of the sale price--to buy.

The date at which the agreement expires varies by contract but is typically between two and five years. At that point, the renter can choose to buy the home at the original listed price minus the equity he or she has built. If not, then the homeowner has the option to evict them and keep all payments.

Why would a seller concede to such an agreement? Well, it's not easy to sell a home these days. Last year the National Association of Realtors reported 4.9 million transactions; at the height of the boom, in 2004, 8.5 million new and existing homes were sold. Instead of letting a home sit empty, sellers are looking for any income stream they can tap. Mix in the tight credit market that makes it difficult for anyone still thinking of buying to do so, and it's easy to understand why this particular brand of transaction looks viable.

"With the tight credit market and stricter down payment requirements, rent-to-own has emerged as a trend for people who otherwise would be home buyers," says Eric Mangan, spokesman for, a real estate listing company. His company has started offering sellers the ability to list a home as rent-to-buy, given what he calls a surge in demand.

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Pros and cons

As an investor though it gives you a lot of flexability. You get a tennant that is highly motivated to pay on time and take good care of the property. If they dont they lose their equity. Also, you can already locate a buyer for a property purchased in a down market. With so many people having major credit issues this is a great way for them to build their credit back up. It can be a major factor in aquiring tennants in a very competitive market.



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Lease Purchases & home owners who are underwater

I actually make it a business model to contact homeowners who are underwater to get them to short sale and get them into a lease purchase on a property in the same neighborhood. This works well in certain 2009's SoCal markets where prices are starting to stabilize because so many investors are gobbling up the cheap REOs and putting renters in them for cash flow. Putting a lease purchase buyer in the property not only increases your short-term cash flow but protects your property since the buyer has skin the the game. You can read more about it on my blog: click on "Our Blog".