Rent-to-own-homes give me pause. I'm not against the idea as far as ideas go, it's the reality of what is looks like on paper and how it "seems" to prey on desperation. To be clear a lease agreement is different than a purchase contract. And if someone is holding your money based upon some future promise which is tentative at best - there's a problem!
I'm a contract, details, and numbers person who knows you don't need great credit to qualify for a mortgage. The world operates at large in the fair to good range, and with that in mind it's just too easy to get pre-qualified. And yes, down payment assistance is a real thing.
What's next is NOT about how to Rent-to-Own because a house is not a television! It's about knowing your options to get from here to there without qualifying today.
The most frequently seen non-qualifying methods are:
Lease Option – A fee paid to purchase the rented property in the future *
Lease Purchase – An extensive writing combining a purchase contract and lease *
Rent to Own – An extensive writing which “may” be part Lease Option and Lease Purchase *
Seller Carry-Back aka Seller financing – A writing in which the Seller may “finance” short or long term, subject to the Dodd-Frank Act **
Land Contracts – Rarely written in Arizona with good reason ***
The important things a Buyer should understand with the methods presented above are:
Fees, deposits, down-payment, and/or earnest money are required at the time of writing these agreements.
There are usually punitive damages for non-performance (if you don’t buy) resulting in the loss of monies paid.
Such agreements benefit the Seller, and those who are unscrupulous (without any intention of selling,) move from one “wannabe home owner” to the next, fueling their bottom line by thousands of dollars of forfeited money from buyers who couldn’t “pull the trigger.”
Here is a link to MLS with homes for sale in Chandler, Gilbert, Mesa and Tempe offering "terms of sale." If you can't wait to see them come back to continue reading - or just stay with me for another minute or two.
When can these types of contracts work for a Buyer?
These types of contracts can only work when Time and Control are the factors which prevent a Buyer from qualifying for a mortgage. These can only be known (with a fair amount of certainty) until after speaking with a lender or mortgage consultant who will “tell you” where you are deficient. Examples of Time and Control items are:
Tax Returns – You haven’t filed. You need to file. You will file. (Control)
Foreclosure – You had a foreclosure and are almost finished with the “aging” phase. (Time)
Debt Ratio – Your $600/mo car payment will end in four months. (Control & Time)
Job History – Need two years…Almost there…You will not quit. (Time & Control)
When are Buyers most often doomed to failure?
If Time and Control are the two elements necessary for success, then lack of one or both can portend failure and loss of money. For many, these are:
Inheritance – You are an inheritor of money or property but must wait for the sale and/or distribution of assets. The process can take years if by action of law or if a dispute among multiple heirs arises.
Lawsuit or Settlement – Even if the other party will assume fault and agree to settle, the negotiation process will take an undetermined amount of time. If you find yourself going to court, the timeline from complaint to judgement cannot be accurately estimated.
Promotion – The anticipation of a higher salary and new position.
Lottery – You will win. Yep, me too.
Is it ever safe to Rent-to-Own, Lease Option, Lease Purchase, or use Seller Financing?
In life nothing can ever be 100% assured, so the Buyer’s best bet for success is information. Again, I’ll speak to the issue of Control - and whose actions can a Buyer best control? Their own actions of course! They should pick up the phone and contact a mortgage banker or mortgage lender to find out if they can qualify for a home mortgage. Many are surprised they are actually able, having disqualified themselves.
For those who can’t qualify (yet) there’s still low hanging fruit on the tree in the discovery of “why.” Learn these and what you need to do, and you’ll be on your way to qualifying in short order. Going back to the concept of “Time” when considering a Rent to Own, Lease Purchase, Lease Option, or Seller Financing – and the answer to why you can’t qualify also provides the answer of Time.
Though last in this writing, but certainly not least, is the importance (and writing) of the very specific and detailed contractual documents and supporting addenda. For this, you need the assistance of a licensed real estate professional familiar with these types of contracts, or a real estate attorney. These writings are extensive and detail: rights of tenancy, the responsibility of both parties, warranties, loss, allocation of funds, payment terms, breaches of contract, conveyance of property or lack thereof, provisions to exercise, and forfeiture - to name several items in a long, long list of many. Contracts dictate terms and conditions while providing direction to avoid conflict, and detail consequences when the promises made go unfulfilled.
Contact me with comments or questions if you’re considering a Rent to Own home, or any other non-qualifying purchase arrangement. There’s always more to the story.
*These are not the purchase of real property, but rather a postponement of obtaining a mortgage or cash payment to exercise a purchase contract.
**Seller Carry-Back aka Seller financing usually provides a deeded interest to real property utilizing a Promissory Note and Deed of Trust.
***Land Contracts are rarely used in Arizona due to difficulties and the timeline for foreclosure.