lease to buy home -- what do I need to know.

[beebalmmama]

Okay so this is somewhat hypothetical at this point. Dh and I are hoping to buy a home in the next couple of months. Friends of ours have a co-worker who is moving over seas and looking to either rent or sell their home, sounds like they haven't quite decided at this point (but would happen by July/August).

I think what they would hope to sell it for is just out of our price range and so an outright purchase wouldn't be an option. But our friend did ask them if they'd be willing to do a rent to own sort of situation. Would this be the same as a owner financing? Does anyone know what type of contract you would enter in to do this, rent to own I mean?

We haven't even seen the house at this point. I just wanted some ideas on how this might work before we talk to them.

[JudiAU]

I am under the impression that owner financing is almost always a bad idea. If you can't afford the house you can't afford it if they finance. Buying a house for real gives you protection.

"Lender financing" is a nice way of saying we know you can't afford this house, pay me some sort of downpayment which is a drop in the bucket of traditional mortgage but is everything you can scrape up and can't afford to loose, pay me some inflated rent while I decide what I really want to do with the house, something will happen to the buyers income because the house is out of theeir price range anyway and they won't be able to meet the terms, our agreement gives you little protection, and I will take your money.

Now, they might not intend for this to happen but this is how it often happens.

[beebalmmama]

This is kind of what I was thinking too. That it wouldn't give you very much security in regards to any agreement/contract. Well we aren't about to stop house hunting for it as we have some other options in our price range. But I guess we could potentially stay in touch with them about a rental if our home buying plans fall through and they plan to rent it.

[Caneel]

I dealt with owner financing and rent to own situations quite a bit in my prior jobs.  With a few exceptions, they generally aren't great deals for the buyers.

In a rent-to-own situation the renters typically pay, for example, $1,200 a month of which $1,000 goes towards rent and the remaining $200 towards your down payment.  After five years you would have $12,000 paid towards the house and you would go secure traditional financing for the balance of the purchase price.  Ideally, you would pay 20% over the term of the lease so you would be all set to get a bank loan for the rest.

(I just pulled numbers out of my head)

There are many, many things to consider before entering into this type of arrangement.  Just a few:

Are you paying market rent for the house? (I am using you as a general term)  If you are paying above market rent, it is not a good deal.  This is where emotions often come into play, people are really anxious to own and will overlook the true cost of the deal.   If you are paying market rent, why not just rent a house and save seperately for a down payment?

Who handles maintenance, repairs, property taxes and insurance? It should be the owner, not you.

What happens if you no longer want that house?  Or experience a financial set back?  All of the money towards the down payment will be lost. 

Owner financing is where the property is deeded to you and the seller secures his collateral by placing a lien against the real estate.  You don't pay, the owner gets the property back through foreclosure.  In theory, it is like getting a loan from a bank.

At the shady end, I saw lots of inflated sale prices as well as high interest rates.  When people can't qualify for traditional financing, they tend to make bad decesions when entering into owner financing situations. 

If the sale price is right, the interest rate is fair and the amortization is reasonable, it can work for both parties but more often then not, it is a far better deal for the seller than the buyer.

[diana_of_the_dunes]

There are a few types of owner financing.  One is rent-to-own, which was already covered, and is generally not a wise investment for the buyer.  Another is land contract.  This is risky for the buyer because the seller holds the deed/title to the property.  During the repayment period, if the seller falls on hard times, his debtors can put a lien on "your" house because the seller still technically owns it.  A proper land contract should be recorded by your county recorder, and other legal documents will also need to be signed.  I'd recommend that you hire a real estate attorney to look over any contracts before you sign.

Another type of owner financing is just like bank financing.  You and the seller enter into a mortgage, and an escrow agency is used to hold the deed/title, record and disburse your payments to the seller, and pay property taxes.  This is BY FAR the safest form of owner financing, since you become the legal owner of the property.  Again, you would need a real estate attorney to advise you and look over any contracts.

For more info, take a look at the book "Finding any Buying Your Place in the Country".  A lot of it may not apply for you, but the part about financing and real estate contracts is helpful for anyone.

[mnnice]

I don't think that owner financing of some sort is always a bad deal.  I have had family members both buy and sell land/houses this way in the past and am currently considering selling a house using this method. 

DH and I are willing to forgo getting all of our equity out of our house at once for a hefty down payment and monthly payment.  The potential buyer is our current tenant in this house and she had payed her rent without fail, tidy, clean, and has done the lawn care/snow scooping are required in her lease.  She also has the odd combo of substantial cash for a down payment and trashed credit as a result of a recent divorce.  Anyway in the current banking climate, I think she can afford more house than she can find any traditional lender to lend to her.

Anyway I think there are situation that can meet the needs of both parties better than standard mortgages. That's different that the parties take on the exact same risks as a standard mortgage.