Rent to Own

Rent to Buy agreements are recognized by law as 'installment sales agreements'. Other common names for this agreement type include lease to own (LTO) and rent to own (RTO).  

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How it works (the buyer's perspective):

• The future property purchasing price of a property is determined today
• A future purchase date is established
• The pruchase is not an option but an obligation of the buyer
• The future buying price is locked in, even if the price would have risen beyond that amount otherwise
• You accumulate the down payment (usually 10% of the buying price). Before the future purchase date, you make 3 types of payment. Two of 3 of those payments go towards accumulating the down payment. They are as follows. 
1. offer in consideration paid at time 0 - CONVERTED TO DOWN PAYMENT AFTER RENT PERIOD
2. monthly maintenance fee - CONVERTED TO DOWN PAYMENT AFTER RENT PERIOD
3. rent (not converted to down payment)
• The rent will not rise as it may have otherwise in accordance with rising market rates

Suitable to buyers who

• need to buy time
• they have credit issues
• do not have enough funds for the down payment

Potential Downsides & cautionary measures

• A lot can go wrong during the 'rent' phase. For instance, the buyer may have found something better or still can not qualify for a mortgage.  
• You run the risk of fixing a price that remains somewhat stable while paying the convertible amounts and rent that even exceed the estimated future value 
• Buyers should be very careful.
• The agreement is often not compliant with the law; where the seller drafts all the legal documents in his favor. In fact, many of these agreements do not end with the buyer getting the deed and owning the property outright.
• The agreement often places excessive burdens of outright ownership onto the buyer taxes, repairs and improvements. 
• The seller often does not give the buyer due time to get back on track if or when he encounters financial difficulty
• The seller often does not give the buyer the requisite notices in the event of default payments before eviction
• The burden of proof often falls too heavily on buyers who must present records they were unable to maintain
• The seller does not usually present information upfront as they should to inform the buyer that there are no liens on the property (like outstanding mortgage payments, taxes, utility bills and so on). In fact, if buyers pay the seller some of the fees directly, buyers have no assurance that the seller did in fact pay further as they were supposed to
• the middle man (like investors) should be trust worthy. He should not encourage the buyer to enter such agreements if the buyer is not certain to be ready to proceed when the rent period ends. Otherwise, he may be setting up the buyer to fail to pocket some of what the buyer paid towards the ownership. These middle people may be good salesmen in terms of selling the idea but lack experience. In that case, ask about his or her successful experience in the area. If they are new to it, ask about the mentor who is closely supervising over your case

What if the purchase is no longer suitable?

For several reasons, purchasing after the 'rent period' may no longer be suitable. For instance, the buyer may have found something better or still can not qualify for a mortgage. 

• the buyer will lose all 3 payments. This translates into losing after having paying inflated rent rates.

DOs

• Speak with an attorney for the sake of your due diligence
• Enter into such an agreement only if you are surely capable of pursuing the purchase after the the rent period. In that case, if you need a mortgage, ensure you already have pre-approval BEFORE entering into such an agreement. Otherwise, you will have no recourse if you can not afford the property after the rent period has ended.
• Request a 'purchase early' option, ie the opportunity to prematurely end the rent period and advance into the purchase if your circumstances allow this.
• Request an 'option to extend' the rent period.

---------------- Here is an example (complements a YTer)

Today's value: 160K

Today's expected value in 3 years: 180K

Deposit (10% property value): 18.0K

Before moving in, you pay:

'Offer in Consideration' (apx 3 months rent): 4.0 K - CONVERTED INTO DOWN PAYMENT

Each month for 3 years, you pay:

Fixed / unchangeable Rent: 1.0K   (ie 36.0K) - NOT REFUNDABLE

Maintenance: 0.4K  (ie 14.0k after 3 years) - CONVERTED INTO DOWN PAYMENT

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CONTENT RELATED TO RENT TO OWN

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