Can someone explain to me how "Lease to Own" house buying works?

[Juniper]

I would appreciate it! We are considering doing this, but I want to make sure I understand how it works and what it entails. What are my responsibilities and what are the seller's? When do things like downpayment, commissions and official financing come into place?

 

Does the lease payment go toward the total purchase price? Or am I just paying a regular lease until my credit improves enough for traditional financing?

[ashfern]

A lot of it depends on how you set up the contracts. You will have one contract to purchase the home with a closing date 1-2 years out. You add an addendum to that contract which is the lease contract. It's a normal lease. The amount of down payment varies but usually at least part of it is nonrefundable as long as you don't violate the lease. All of it applies when you close on the house. You can set up the lease that part of the monthly payment is credited to the down payment at closing. That situation is usually for when you can't come up with the lump sum payment but can afford a little higher monthly rent. Sometimes a seller will set up the lease that you are responsible for minor repairs while renting instead of a regular rental where the owner does all that stuff. It really depends on the laws in your area, what you ask for in the lease, and what the seller wants. Definitely read over both contracts thoroughly so you know what's going on. Some contracts will have a provision that if you have any lease violations that the purchase contract is void and you forfeit any down payment.

[Reeciecup]

I know someone who did a rent to own. She paid $5000 down and then made monthly payments for several years, maybe 3 or 4. But the house was never transferred into her name, and she didn't know that. When the owner of the house defaulted she lost the house because she had no legal claim to it. It was really sad because she lost the house just months after her husband died, and she had to move into an apartment.

[Guest inoubliable]

The only times I've ever known anyone to do that, they regretted it later. The payments to the owner were usually a lot higher than what they would have paid to a bank if they'd just waited to get a loan through a "real" lender. And the price of the house was usually much higher, too. Example: my grandfather lives in town and called us up a few months ago to tell us that there was a house on his street for sale. Lovely little ranch house with some upgrades. We went to look at it (not intending to buy but to appease my grandfather). We already knew that houses there were selling for about $85k these days. The guy wanted $150k. Pass.

 

The contracts and paperwork can be skeevy, too. If you do it, make sure you look at comps in the area to be sure you're not overpaying. Check out a mortgage calculator online and look at current mortgage loan rates. And, lastly, get an attorney who specializes in real estate to check the paperwork before you sign. GL!

[elegantlion]

The ones we've used have the payment going towards a purchase price. Usually there is a down payment of some kind. In some cases the home is transferred to your name, in some cases not. Most of the ones I've seen or done, have a refinance clause in the contract: for instance, the lease is 5 years. After that time you have to refinance it into your name, with all the payments being taken off the original purchase price.

 

The only issue is most of the time the interest rate is higher because the owners are basically financing you. That's not a bad thing, and can still be cheaper than rent.

 

There are many ways it can be done successfully, so I would hire your own real estate attorney to look over any paperwork.

[Joshin]

We bought our house this way. We are self employed and needed one more year of tax forms reporting our self employed income to get a loan. We had to move out of our rental immediately and we didn't want to move again in a year when we were ready to buy. We did it the round about way. We found a house we loved, convinced the owners to lease instead of sell, and struck a deal. We put down a $1000 deposit, which counted toward our down payment, and 10% of our monthly rent payment also went toward the down. We agreed to handle all maintenance costs during the lease period and do some necessary painting (deck and window trim) that would have to be done if they sold the home, in exchange for them covering the closing costs. Filed our taxes in January the next year and closed on the home within 30 days. It was painless for us, but we didn't have credit problems, just needed time to prove income. We also only approached FSBO homeowners so a real estate agent wasn't involved. It helped that houses were selling extremely slowly at the time, so the owners were more open to the deal. We found owners that were moving out of state, so it was better for them to lease for a year than to have the house set empty.

 

Edited to add: We secured our own financing when it was time to buy, it was not owner-financed.

[Juniper]

Thanks everyone! I went and looked at it this morning. My realtor is pulling comps right now and I am waiting for my dh to get up here so he can see it and decide if we want to go through with this. I think we are going to go through a very formal route with this. Down payment, contracts, and the whole bit. If we get to that point and everyone is agreeable I will pay to have a inspection done and I suppose that is the final thing to figure out. I am not as intimidated as I was this morning after having a long talk with my realtor. At least she has some experience with it! ;)

[TranquilMind]

I would appreciate it! We are considering doing this, but I want to make sure I understand how it works and what it entails. What are my responsibilities and what are the seller's? When do things like downpayment, commissions and official financing come into place?

 

Does the lease payment go toward the total purchase price? Or am I just paying a regular lease until my credit improves enough for traditional financing?

 

 

The only way I'd sell a house this way to someone with poor credit is to request a large downpayment as an Option to Purchase, which will convert to a price reduction when the buyer exercises the option, which would be limited to something like 3 years.

 

The buyer can exercise the option at any time, and the Seller has money in exchange for removing the property from the market.

 

This option must be totally separate from any ongoing Lease. All terms must be included in the Option, like who is responsible for what.

 

Most of these options don't work out. The Buyer can't usually perform. Some do, though and get a lower price than they would have gotten in a rising market. I don't see a lot of benefit in such an agreement today. Why not just save your money for a downpayment and then offer to buy either the house you are in, or another that is available at the time. Leaves you open for more options.

[TranquilMind]

We bought our house this way. We are self employed and needed one more year of tax forms reporting our self employed income to get a loan. We had to move out of our rental immediately and we didn't want to move again in a year when we were ready to buy. We did it the round about way. We found a house we loved, convinced the owners to lease instead of sell, and struck a deal. We put down a $1000 deposit, which counted toward our down payment, and 10% of our monthly rent payment also went toward the down. We agreed to handle all maintenance costs during the lease period and do some necessary painting (deck and window trim) that would have to be done if they sold the home, in exchange for them covering the closing costs. Filed our taxes in January the next year and closed on the home within 30 days. It was painless for us, but we didn't have credit problems, just needed time to prove income. We also only approached FSBO homeowners so a real estate agent wasn't involved. It helped that houses were selling extremely slowly at the time, so the owners were more open to the deal. We found owners that were moving out of state, so it was better for them to lease for a year than to have the house set empty.

 

Edited to add: We secured our own financing when it was time to buy, it was not owner-financed.

 

 

This is the only way to do this. Not recommended for the credit-impaired, unless they are very diligent about repairing credit and getting approval.

[TranquilMind]

The ones we've used have the payment going towards a purchase price. Usually there is a down payment of some kind. In some cases the home is transferred to your name, in some cases not. Most of the ones I've seen or done, have a refinance clause in the contract: for instance, the lease is 5 years. After that time you have to refinance it into your name, with all the payments being taken off the original purchase price.

 

The only issue is most of the time the interest rate is higher because the owners are basically financing you. That's not a bad thing, and can still be cheaper than rent.

 

There are many ways it can be done successfully, so I would hire your own real estate attorney to look over any paperwork.

 

 

Yes, this is an ATTORNEY issue, not a Realtor issue. Realtors cannot draft contracts; they can only fill out forms. A real estate attorney can prevent problems on down the road, and is far cheaper for document work than you will have to pay a Realtor from the sale. (And yes, Realtors are paid from the proceeds, so actually the buyer is paying).

[TranquilMind]

I know someone who did a rent to own. She paid $5000 down and then made monthly payments for several years, maybe 3 or 4. But the house was never transferred into her name, and she didn't know that. When the owner of the house defaulted she lost the house because she had no legal claim to it. It was really sad because she lost the house just months after her husband died, and she had to move into an apartment.

 

The house should not transfer into her name until she owns it. However, a knowledgeable real estate attorney-drafted contract would have preserved her rights.

[Juniper]

 

This is the only way to do this. Not recommended for the credit-impaired, unless they are very diligent about repairing credit and getting approval.

 

 

Yeah, our credit is in a funk due to a mess with a very nasty bank. FHA got involved and slapped there wrists, forbid them from coming after us, but we still ended up with foreclosure even after have three pre-approved contracts within a couple thousand of our pay off price. Bank sat on them for over 6 months, lost the contracts and it was a mess. After the third we just couldn't float it anymore. Thankfully, there isn't a ding on our credit in over a year so in a couple more we should be cleared to purchase conventionally again. Both Realtors know the situation, know that we are solid. The bank just insisted we could afford 2 homes and insisted we not pay our medical bills, we refused to not not pay the Drs that worked so diligently on my sons for various surgeries. Not a place I ever want to be in again.

 

Honestly, I don't want to buy right now, but available rentals are almost non-existent up here. :(

[Juniper]

The only way I'd sell a house this way to someone with poor credit is to request a large downpayment as an Option to Purchase, which will convert to a price reduction when the buyer exercises the option, which would be limited to something like 3 years.

 

The buyer can exercise the option at any time, and the Seller has money in exchange for removing the property from the market.

 

This option must be totally separate from any ongoing Lease. All terms must be included in the Option, like who is responsible for what.

 

Most of these options don't work out. The Buyer can't usually perform. Some do, though and get a lower price than they would have gotten in a rising market. I don't see a lot of benefit in such an agreement today. Why not just save your money for a downpayment and then offer to buy either the house you are in, or another that is available at the time. Leaves you open for more options.

 

Right now we are in the in-laws basement. We are in pretty good hands up here. I had another realtor call us last night offering to purchase a different house himself (he also owns quiet a few rental properties that are all filled up right now) and then turn around and do the Lease Purchase with us. We both decided that house was just to small.

 

The one this morning was much larger. We should have enough for a sizeable down payment. We shall see what happens. My dh's job is actually in land, real estate, contract negotiations so I am not worried on that end as much as I want to make sure we are adequately protected as well as the seller feeling comfortable.

[Rident_Mama]

Our experience is a little different. We wanted to sell our house outright, but ended up wanting to provide it to a military veteran and his wife via rent-to-own instead. Evidently, veterans are told that they will get an incredible rate for homeownership, but they must hold a civilian job for 6 months before it comes available. They are very good stewards of their money and have no debt (not even a car payment!).

 

We set up a lease agreement and a separate rent-to-own contract detailing who was responsible for what, where the downpayment went (their choice, they wanted to make a lump sum payment to drop the monthly lease amount), how much of the monthly lease payment went to their downpayment, what monies they would receive back should they decide to change their minds about owning it, etc. We worked together on it until both parties were satisfied that all of the bases were/are covered.

 

Long story short, not everyone looking for a rent-to-own home is financially wayward, some are just stuck until circumstances open themselves up otherwise.