I recently saw in the blogosphere something that bothered me a little – it was an article written by a realtor who was cautioning home buyers to not use the rent to own as a way to buy home and citing an example of how one of these deals had gone badly for one of their previous clients. I will come right out and say rent to own as a business has the worst reputation in real estate – now this is for several reasons. Firstly this is the scenario that most new investors get into without proper legal advice and not in many cases knowing how to properly analyze the deal both for the TRO company as well as the tenant-buyer. This is really unfortunate because some well-intentioned newer investors could be inadvertently setting up their clients to not be able to close the deal because they did not have the numbers right from the beginning, now there is a solution to this: you can extend the term for another year or more to make sure the tenants can bump up their credit and be able to get a conventional loan. There are some bad apples in every business and real estate is no exception with an above-average concentration of bad actors in real estate in RTO because it looks like easy money to put unsuspecting tenant-buyers in a home that they could never afford, take their deposits, not keep an eye on them and then disappear into the night. That could happen with any business investment on either side of the RTO fence line buyer and owner alike – when you are thinking about getting into a rent to own with any company you need to do your homework getting the contracts looked at by a lawyer (a creative real estate lawyer so send me a note if you do not know the difference) and do some digging into how long the rent to own company is in business, how much checking up on you they plan to do over the term, is there an option to extend if something happens, and how long the mortgage broker they deal with has been in the business. The realtor previously mentioned has of course bias in this debate such that she suggested that you just save up the 5% down payment and go to your bank to get a standard mortgage which is great for her -because she gets to make a standard sale without doing any extra work or thinking outside of the box. The main benefit of RTO is that you do not have to save up the whole down payment to start your path to homeownership not to mention if you have damaged credit you can’t get a loan from the banks these days. I think all realtors could benefit greatly from helping the tenant buyers out there know that this is also a good option for their buyers who can’t get qualified right away for 3 reasons:
1. They get their client into a house faster getting referrals and the eventual sale of they sell down the road
2. Referrals for their mortgage brokers which helps their relationship
3. Standard sales through tenant first rent to own investors!!
Rent to own gets a bad rap, and in some rare cases they deserved it… but more often than not this is a great strategy that helps both buyers and sellers get what they want sooner.
To your success!
Tim R