American Dream or American Scheme?

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Buying a home is the American dream but for many not the American opportunity. Crisis like unexpected job layoffs, illnesses, divorce and other “life happens” experiences can leave you with a credit score so low banks laugh when they see it. But, it’s your dream anyway and you’re tired of paying rent which won’t secure your future. You spot a sign in the yard of a decent looking house with “Rent to Own” bad credit ok and an opportunity has come knocking on your door. Sometimes this scenario has a happy ending but, more often than not, it turns into just another “life happens” crisis.

The reason is communication from the buyer and the seller. Here’s a red flag right at the beginning of negotiations, there is no standard rent-to-own contract. Each owner can, and will, include or delete options for their advantage. The wording can be complex and is designed basically to meet the state regulations you live in but the owner can adapt it beyond that. For instance you need assurance in the contract that your rent money goes toward taxes, mortgage insurance and home owners insurance so three years down the road it’s not put in foreclosure. Look at the last appraisal and when the last inspection was done. Make it very clear in the contract who is responsible for what repairs.

Also, at the end of the contract (3 to 5 years) you must secure financing on your own, up to this point the portion of funds the landlord agreed to put toward your home is basically to cover the down payment. Unless something has been worked out with the seller or there’s a clause protecting you in the contract you’ve just lost your investment and probably your home. There are success stories that have worked out well but make sure you are making the best informed choice possible. Here is a list of pros and cons to think about.

PROS

  • This transaction gives the buyer (the advantage) to lock in the price in advance, but if the home value goes down, he can choose to renegotiate the deal or move on.
  • Buyers could also get the upper hand — and sellers, the disadvantage — if the home’s value rises more than expected. Say the house is currently valued at $200,000 and the buyer and seller agree to a purchase price of $230,000 in three years. If the home ends up worth $250,000 in three years, the seller loses that extra $20,000.
  • An advantage of a rent-to-own contract for the buyer is that she has additional time to save for a down payment. A buyer also gets additional time to clean up her credit history if she has negative marks due to collections or late payments.
  • A rent-to-own home allows a buyer to try the area before he purchases a home. He gets a feel for the neighborhood, schools and overall environment, including crime rates. A buyer also does not have to wait weeks or months to move in while the inspection, appraisal and documents are gathered. He typically moves in as soon as he pays the upfront fee and lease payment.

CONS

  • Buyers lose their investment if they fall behind in payments. If a buyer pays $1,200 each month for a home, with $400 of the payment each month to go towards the down payment; they have accumulated $14,400 at the end of three years, as an example. If a buyer decides not to purchase the home, falls behind on payments or is evicted, he loses the investment.
  • A buyer loses out on their investment if he cannot secure financing at the end of the contract term. Unless he works something out with the seller or has a clause in the original agreement, he risks losing out on any fees or extra rent paid during the course of the contract.
  • Not all the money you pay in rent will go toward the down payment. Owners are the lenders and they are the ones who decide how much of your rent payments are credited toward the down payment and closing costs. Most owner/lenders will only allow a credit for an amount paid above the market rate for local rentals to be held for eventual home buying costs.
  • If you decide not to buy the house at the end of the lease, you probably won’t get a refund. That money is usually only returned to you when you buy the property
  • If the house is a “fixer upper” you may not have the extra money for material and labor to maintain it. Big items like roofs, foundations and integrity of the structure, if not fixed, could cause the home insurance to cancel for the owner. In addition because you are not the legal owner yet you cannot take advantage of the many organizations that could help with these problems at low or no cost. Even if the owner gives them permission to make repairs they will bill him because his resources will not qualify him for the assistance.
  • Watch out for “slum lords” who want the rent money but who do not want to spend the money to maintain their properties as required by legal guidelines. If you are buying it then the burden becomes yours. They can evict and resell to the next victim over and over.
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