Problems with Rent-to-Own or Lease/Options
Rent-to-Own or Lease/Options have been an option to acquire a house or home for a long time.
The premise is very simple. The buyer rents or leases the home for a set period of time (1 to 2 years) while the buyer fixes the problem that kept the buyer from qualifying for a loan. When the buyer can get a loan, the buyer buys the home.
The contract usually requires the buyer to provide some non-refundable “Option Money”. Sometimes the buyer pays over market rent and the seller rebates that extra amount along with part of the fair market rent for the buyer to use for their down payment or closing costs at the purchase.
There are many other variations but these are the basics. Rent-to-Own or Lease/Option can be a great program when they work. They are ideal for people who are self employed and do not have 2 years of tax returns to qualify for the loan. It also works for people who have had a Bankruptcy, Foreclosure, Short Sale or just bad credit.
There are two major problems or drawbacks with Rent-to-Own or Lease/Option contracts.
Problem 1: Lack of available properties.
The seller has to be willing and able to rent or least the property for 1+ years. They also have to be willing to set a price today that may be high or low at the end of the option. If it is too high, the buyer may back out. If it is too low, the seller left money on the table.
In the San Diego Multiple Listing Service (MLS), there are currently over 8000 houses & condos currently for sale. Of that number, only 45 state that they will entertain a Rent-to-Own or Lease/Option. That makes it a real challenge to find a home the buyer likes when only ½ of 1% is offered. Then you still have to compete with the traditional buyers with loans or cash who want to buy that home now. Often a Rent-to-Own or Lease/Option buyer would have to give the seller a higher price to sweeten the offer. In the last year, the MLS shows that over 31,000 homes sold and only 2 used a Rent-to-Own or Lease/Option. This is pretty high odds against a Rent-to-Own or Lease/Option working.
A second source to find a Rent-to-Own or Lease/Option is online in Craigslist or a For Sale By Owner site. Now the “Wild, Wild West” can arise and it is buyer beware. The buyer will usually not have the assistance of a Realtor to guide them. Most of us have heard the scary stories of land sharks and criminals on Craigslist. As a percentage, it is probably very low but still dangerous.
Problem 2: Short Time Frames
The problem arises when the seller does not qualify the buyer to make sure they can buy within the Rent-to-Own or Lease/Option time frame. The sharks (and the legitimate sellers) usually want a 1 year Rent-to-Own or Lease/Option. It usually takes longer than that to become qualified. This is where the Rent-to-Own or Lease/Option scam comes in. Land Sharks preying on people who were down on their luck and just starting to get back on track.
The seller gets $10K to $20 up front, charges a higher rent with the promise to give the overage and more back in a year. The tenant moves in, is responsible for all the repair work and fixes up the home, thinking that they will be owning it soon. One year later the seller tells the tenant to get the loan or leave. Most of the time the shark seller picks someone they expect will not be able to perform…There goes the dream and the money!!!
Fortunately, there is a new type of Rent-to-Own or Lease/Option available that eliminates both of these problems. Dennis Smith with RE/MAX BY THE SEA recently discovered a group of investors who are willing to buy homes for CASH and Rent-to-Own or Lease/Option them back to the future buyers for up to 6 years. This will give most people who are self employed, have had a Bankruptcy, Foreclosure, Short Sale or just bad credit, enough time to take care of these problems and get a loan. If for some reason they can’t qualify or their situation changes, they can sell their option. The other big advantage of this program is that cash investors usually get a better price when they buy the home. The purchase price sets the basis for the home. The tenant gets to choose almost any home in the MLS. This is a WIN-WIN for everybody.
Of course, some restrictions apply. This is not a “no money down” program. Tenants need to contribute 8% of the price up to $546K and 13% from $546K to $2M. The 3% goes to closing & transaction costs and the remaining 5% or 10% is held in escrow for you until you are ready to buy or sell. The home must be at least 3 bedroom and be a detached house, townhome or PUD. No stacked condos or mobile homes. This program is limited to CA, AZ, WA, OR, CO and FL. It is also limited to owner occupied as opposed to investor homes.
When the tenant is ready, there is a short qualification from, a quick qualification chat and then we get to go shopping for your next home. If the buyer is interested in a home outside of San Diego County, we have referral partners who can help the buyer locate the right home for themselves anywhere in CA, AZ, WA, OR, CO and FL.
This program allows a person or a family to Rent-to-Own or Lease/Option and live in the home of their choice today while they seek to qualify for a traditional home loan to purchase the home in the future at a pre-determined price.
If you, of someone you know is are self employed, have had a Bankruptcy, Foreclosure, Short Sale or just bad credit, and would like to Own and start on the path to homeownership today, have them contact Dennis Smith at
RE/MAX BY THE SEA. 760-212-8225.
This information is brought to you by:
Dennis Smith, ABR, SRES, e-PRO, CDPE, Realtor® CalBRE# 00476662
Sunshine Smith, SFR, Realtor® CalBRE# 01249837
760-436-0087 or cell at 760-212-8225
Providing quality Real Estate services in the North Coastal San Diego area including Del Mar, Solana Beach, Rancho Santa Fe, Cardiff by the Sea, Encinitas, Leucadia, Olivenhain, Carlsbad, La Costa, Aviara, Oceanside, Vista, San Marcos, San Elijo Hills, Escondido; all San Diego County.