We get many calls a week from prospective homeowners asking whether our landlords will consider "Rent to Own" and, if so, what the terms would be.
What is "Rent to Own"?
Here's How Rent-to-own Homes Work explains "Rent to Own":
"... Also called a lease-to-own house, the process works similarly to a car lease: Renters pay a certain amount each month to live in the house, and at the end of a set period -- generally within three years -- they have the option to buy the house. Each month of rent they pay is income for the seller, while a portion of it goes toward a down payment to eventually buy the home."
Why Tenants Ask About "Rent to Own"
Tenants usually ask about "Rent to Own" because they want to buy but usually are not in a financial position to buy (they have low credit scores, no or little down payment and uncertain job situations). So "Rent to Own" is like having your cake and eating it too. The tenant pays rent to the landlord but the landlord agrees to take a portion of the rent and put it toward the tenant's down payment. The tenant starts to view the rental property as his or her future home, fixing it up, making upgrades and having some pride of ownership.
>> See Lending Expert Tips On Credit Reports & How To Qualify For A Mortgage
>> See How Much Down Payment Do You Need To Buy a Home?
>> See Renting an Individually Owned Home vs An Apartment: What's Different?
So the tenant asks us "would the landlord consider selling at some point down the road? And, if so, what would the sale price be? Would the landlord consider putting a portion of the rent toward the tenant's down payment and, if so, how much?"
In certain markets, this is a win/win for all parties - tenants and landlords. But in our market, we rarely see landlords pursuing this path. Frankly, the tenants often ask these questions too early in the process, i.e., at a time when there are too many uncertainties. Let's take a closer look.
Why Our Maryland Landlords Don't Pursue "Rent to Own"
Although in principle "Rent to Own" sounds good, it's just not popular with our Maryland landlords. There are just way too many uncertainties.
1. Our landlords are usually reluctant landlords.
They are renting out their homes because they cannot sell and they are usually not making a lot, if any, cash flow on a monthly basis. The rent is used to pay the landlord's expenses (mortgage, taxes, HOA fees, etc.). Many of our landlords are actually in a deficit situation every month so there is no money to put towards a down payment. The tax deductions and depreciation very much factor into whether our landlords make money on an actual basis.
>> See Should I Sell Or Rent Out My Home? What Is Your Temperament?
>> See Tax Deductions & Rental Property Depreciation Advice for 1st Time Landlords
2. There are also too many unknowns:
- How long will it take for the tenant to bring up his/her credit score?
- How long will it take the tenant to save for the down payment?
- What will values be at this unknown time in the future? How can we possibly determine a sale price now when we don't know what home values will be at this undetermined time in the future?
- What will the interest rates and loan programs look like? Since we don't know the loan program, we don't know how much down payment a tenant/buyer will really need.
It is impossible to negotiate a "Rent to Own" agreement when we don't have the answers to the above questions.
3. When might "Rent to Own" work:
Let's start the "Rent to Own" discussion once we are in the lease and when a tenant/buyer can give a definite date by which they can buy, usually within the time frame of the lease, when the landlord is much more likely to listen. Perhaps you can buy now (you have the credit scores and the down payment) but don't want to buy now (you want time to solidify your job or your relationship). You sign a one year lease, solidify your job or relationship, secure a loan approval letter from a reputable lender and make the landlord an offer to buy while you are within the original term of your lease. You have a definite settlement date, a definite loan commitment and now you ask for certain "Rent to Own" terms. This actually may work for the landlord and may be win/win for all parties. The landlord can see 'the light at the end of the tunnel" and is much more willing to work with you.
>> See Buying A Home In The Baltimore Area? Go Local!
4. Many times it just happens
While running Chesapeake Property Management over these past 17 years, we have had several situations in which the tenants, during the term of the lease, have negotiated to purchase the property from the landlord. We do not set terms prior to the lease start date. However, while we are in the lease, the tenant expresses interest, gets financing and offers a price and terms to the landlord. Sometimes it works and sometimes it doesn't. But we are here to help you structure the strongest offer possible and, if we can make it win/win for all parties, we will make it happen.
>> See Buying A House This Spring? Ten Tips To Get You Started.
>> See Not Sure Who To Trust In The Real Estate Business?
Still Interested in "Rent to Own" in Maryland?
If you are still interested in "Rent to Own," here is what I recommend. Contact us at Yaffe Real Estate, rent a Chesapeake Property Management property. Be open with us; tell us your real estate goals. We will keep the lines of communication open with the landlord so that when you are ready to make an offer, the landlord will be open to listening.
