Potential Pitfalls for Buyers

Rent-to-own arrangements are an ideal solution for prospective buyers to live in their dream home now and to pay for it later. The buyer has an opportunity to experience home ownership now versus later. Prior to signing a rent-to-own agreement or rent-to-own contract, a buyer should consider the following tips to ensure a successful transaction:

1. Access the seller's credit history. Be on the alert for signs that the seller is experiencing financial distress, such as credit accounts that are delinquent or large debts that are past due. Moreover, even if the seller does have a satisfactory credit history, a prospective buyer who currently lives in the home should still be aware of warning signs that point to the fact that the seller may be experiencing financial setbacks. These signs, include calls and letters from debt collectors, for example.

2. Be mindful that the seller could potentially lose ownership of the property during the rental period. This could happen for several reasons, including the seller's inability to continue making mortgage payments, a government entity placing a tax judgment on the property, the seller going through the legality of obtaining a divorce and other possibilities.

3. Make certain that the lease option mentions who is responsible for maintaining and repairing the home. The agreement should also mention which types of modifications and improvements can be made to the home during the lease option term.

4. Choose a "lease-option agreement" versus a "lease purchase agreement," because choosing a lease option provides a buyer with the option to purchase at the end of the term, but if he changes his mind, there is no legal ramifications. Conversely, choosing a "lease purchase agreement," requires the buyer to purchase at the end of the agreement and backing out of the agreement will have monetary and/or legal ramifications.

5. Obtain an appraisal and home inspection to ensure that the home purchase price is fair prior to signing any contract.

6. Be mindful that unscrupulous sellers may decline to sell the property at the end of the lease-option period. Thus, the higher rent that you have paid for the property may be lost. In addition, the seller may attempt to back out of the agreement if the real estate market has significantly increased and property values have appreciated. In this situation, the seller may attempt to obtain additional money for the property from you. The above actions are illegal, to say the least, but obtaining the counsel of a real estate attorney is the best recourse for unscrupulous sellers.

7. Be aware that if the real estate market declines and property values depreciate, you are obligated to pay the home's purchase price in the contract. In this case, the buyer can simply choose to decline to purchase the property at the end of the lease option and search for a more affordable home. The downside to this choice is that the buyer will lose the extra rent paid allocated for the down payment. Thus, consider whether taking the risk of losing funds is in your best interest.

8. Speak with a mortgage broker to understand the requirements for qualifying for a home mortgage in the future. Ensure that there are no issues in your credit file to prevent a home purchase. While it is common for many buyers to choose to enter into rent to own situations due to not being able to qualify for a mortgage, it is important to remember that the buyer should be ready to qualify for a mortgage at the end of the agreement in order to avoid losing time and money.

9. Obtain a copy of the title report to determine how long the seller has owned the property. Typically, the longer the seller has held the title, the more equity the property should have accumulated into it.

Summarily, although you are renting the property in the beginning, it is still wise to go through the same processes as if you were purchasing the property. This is even true for those who can enter into traditional financing. Prospective buyers who need additional time or need to keep their funds liquid in the present, however, may find rent-to-own arrangements very beneficial.

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