The Real Estate Encyclopedia
Renting To Own_ Is It a Good Idea?
Category - Real Estate Information Sources - Real Estate Articles

This article deals with some of the issues and potential pitfalls of home sellers considering a rent-to-own scenario.  It is not intended to be legal advice, but if you consider some of these potential problems you may avoid a situation that will be much more trouble than it's worth and may not have the outcome you intended.

For many years now, the thought of renting to own a home was rarely an issue.  In fact, in many real estate markets across the country, sellers could sell their home in such a short time that it was never a thought.  However, the changes we have seen in virtually every real estate market across the country have made this issue more common today and sellers considering it may want to think twice before diving in.  Despite what seems like at least a short-term solution to a home-seller's problem of not being able to sell their home and move on, renting-to-own brings its own set of problems that many sellers don't realize until it's too late.

A buyer who proposes this scenario usually presents with a problem:  They love the home and want to buy, but because of some "minor" issue with employment verification, job history, credit misunderstanding, etc., they cannot get a loan right now.  They can, however, make the payments so they offer to rent while their "situation" gets cleared up.  The devil is in the details, though, and typically the deal involves fixing the price at the outset of the lease, the buyer/tenant has to give notice at some point during the lease that they intend to buy, and some or even all of their rent is applied toward the down payment.

For a seller who has had their home on the market for months with no prospects and another mortgage payment due, the prospect of renting and selling can sound pretty good.  However, before diving into this situation, sellers may want to think about some of the pitfalls and consider either avoiding it altogether, or at least getting some legal advice.  From an owner's perspective, fixing the sales price today and giving the tenant/buyer in effect an option to buy later at that price, may not be financially sound.  In most cases, the buyer has no obligation to buy - only to rent - and they are usually only interested in buying if the value goes up over the lease term.  Good for the buyer - but bad for the seller.  There are other issues as well, like a tenant actually going down to the county and recording the lease, which would cause the seller headaches they never considered or planned for.

There can be legitimate situations where this type of transaction can work well for both parties, but they are relatively rare and even then, sellers should consider all the potential problems and get some sound legal advice before signing any documents.  The vast majority of the time these types of transactions never end up like the seller thought when they signed up and at the end of the day, they end up with far less than they would have if they had simply waited for a traditional buyer who could qualify to buy today.

If you are considering selling your property under an arrangement like this, you may want to consult with a Realtor and attorney in your state before deciding.  A traditional buyer in the hand may be worth more than a tenant in the bush!



Phil Boren's Profile
Phil Boren is a 26-year veteran real estate Broker and Realtor with RE/MAX of Boulder, the #1 RE/MAX office in the U.S.  He has served as Managing Broker for over 200 agents with Century 21 and RE/MAX, previously held the MAI Designation from the Appraisal Institute, and was recognized as the #14 individual in the 5-state Mt. Region by RE/MAX International in 2001.  Read more here.


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