Today we’re going to talk about the five lease to own (a.k.a rent-to-own) problems, and solutions for home shoppers. The problems with lease to own homes come down to five things in our opinion:
1. Trust
2. Bad Homes
3. The Paperwork
4. Not being the right fit
5. Failure to follow through and buy the home as intended.
We’re going to break down each of these five problems and talk about solutions to overcome them.
Starting with number one, trust. Lease options, or rent to own homes in general, have a bad rap. Almost like rent to own furniture, where unless you really know that individual, it can be a little bit sketchy.
It’s almost like a used car salesman feeling when you’re trying to get a rent to own home because they’re not the industry norm. It’s not a normal rental, it’s not a mortgage that’s highly regulated, it’s kind of this gray area. This makes trying to find a reputable company, or a person that’s going to sell you a home on a lease option a difficult task.
In and of itself, there are 1000’s of homes that go under contract every year that are lease options. Some of those know the individuals or the homeowners that are selling those on lease options, some of them don’t. There’s just this general trust that you need to have to go forward with to be able to do this. To overcome this, if it’s a large company, you can look at their Google reviews, you can find other testimonials.
You can, you know, maybe fact check these individuals almost like you would any other product on Amazon and figure out what other people are saying about them.
If it’s an individual selling the home, now, that’s a lot tougher. Just like a landlord would potentially screen you, you should screen your landlord. If they’re asking, you know, how much your income is, or how much you can do, then I would ask your existing landlord if they’ve done this before. If they have, ask if they can give you past customers that they’ve done a lease option for that they would be willing to share with you.
Hopefully, they would be willing to say yes, because their whole intent is trying to set people up for homeownership and not just trying to set people up for failure. So that’s kind of solution number one to overcome the trust. You need to review them, and then challenge the homeowner to bolster their credibility, because they’re not in control of everything. You still have the power to say yes or no.
Number two, getting into a bad home.
There are a lot of what they would call slumlords that are trying to sell a home that needs a lot of improvements on a lease to own or a contract for deed. This can be a good thing if the existing homeowner is super handy, and can fix everything themselves.
However, when you start getting into structural, plumbing, electrical or issues other than just painting or cosmetics, that can be overwhelming from a new homeowner, unless you know exactly what you’re doing or you’re a licensed contractor. So most of the time individuals get into a home, they kind of peek their head around, see that the kitchen works, the laundry works, the bathroom works and say, “Okay, I think this home works”, only to find out six months or a year down the road, that it’s got all kinds of problems.
The best way to combat this is to do a home inspection. This is going to be a 300 point home inspection done by a licensed home inspector, that will go through the entire home and tell you everything that’s potentially wrong with it. It’ll tell you if there are issues with it’s plumbing, foundations, roof, siding, electrical, etc.
They’re going to give you a long list of everything wrong with the house. That can be your negotiation against the existing homeowner who’s trying to sell on a lease option, you can say, “Hey, I would like these things fixed”, or, “There’s certain things that need to happen before I’m willing to move into this house and take more control over it.” So that’s number two, don’t don’t get into a lease option on a bad home.
Number three, paperwork favoritism.
So typically, a lease option has a normal lease with a specific option to buy. The individuals that have crafted this type of paperwork can favor the seller, not the buyer. By that I mean, let’s say you miss one month’s payment of rent, they can technically say “Oh, you missed a payment, and now all of a sudden all of your option fee down payment is void.”
This is a very strict favoritism towards the seller which in our opinion should not be the case and should be something to look out for in your paperwork.
What happens if, for some reason, the check just doesn’t get delivered? There shouldn’t be this two day grace period where all of a sudden you could lose $10,000, so knowing the paperwork and knowing what to review in that is key. The options to get through this are to either hire an attorney, or get a friend to really look through this and talk through everything on the paperwork. Don’t just assume that you have to sign what they provide. Look through it and don’t be afraid to say, “Hey, this doesn’t make sense. What about this?”. Don’t accept them saying, “Well, it’s written in this way, but we’re going to give you that”. That is not okay.
A verbal commitment, although still binding, is not the same as what you legally are signing up for, and make sure that you get it in writing. So that’s number three, the paperwork.
Number four, is it’s just a bad fit, or just not the right solution for you.
There are some individuals where renting, or waiting and trying to apply for a mortgage are better options. You can do this when you improve your credit, or you have your down payment, or you get some additional tax refunds. Some people are so eager to just jump into lease to own because they can find their own home. It can be a great option, but sometimes it’s just not the right fit for you.
So to combat that, really talking with multiple bankers to make sure that you know what it’s going to take for you to get a home loan so you can have a clear plan, whether that’s six months, a year or two years. In addition to the paperwork favoritism, there is the bad fit. The one thing that people absolutely should not do, is sign something that says, “Hey, I can get a bank loan within six months or a year, otherwise, I forfeit everything”. Do not sign that agreement, unless you are 100% sure that you can get this. We’ve seen this so many times with people coming to us saying, “Well, I thought I could get this in order, so I put down an option fee or a down payment, and it took longer to fix my credit score, the taxes didn’t quite work out or life happened.”
That, in our opinion, is more the norm than the exception.
Always give yourself an extension clause to extend beyond, if what happens is you’re not able to refinance or buy that home in a certain time period. That way you and the seller are comfortable with what happens if it extends. It could be that you get to come up with a little bit more of a down payment, or that you get to extend it 12 months at a higher rent, or some sort of avenue. If another solution is proposed, it should be one that gives you not just a true deadline that you have to be done by a certain date, or else. So don’t sign up for something that doesn’t make sense, make sure that it’s the right fit for you. Maybe if it makes sense to just rent, that is a possibility.
The last part is the failure to follow through by the homebuyer. We touched on this a little bit on number four, just not being the right fit for you. However, if you’re truly going to get into this type of agreement, this is meant to be a bridge. This is better than renting, gut it’s not quite all the way to a mortgage. You’re not completely throwing away all of your money, and you’re not forced to move at the end of this time period.
“I will forever believe that buying a home is a great investment. Why? Because you can’t live in a stock certificate. You can’t live in a mutual fund.”
–Oprah Winfrey
With a landlord who can just sell it like he could have a normal rental once you go month to month, they can just say “Nope, I’m not going to renew it”, and guess what? You’re out.
When you have this exclusive option to buy or the exclusive option to extend your term, you are now in control without owning the home. However, the whole intent of this is to help protect your downside from a market downturn and/or help you to either improve the home to sell it on your option, or to eventually get a bank loan.
So don’t confuse this with the short term. You know everything, just try it out. Although maybe some people do want to test drive it, that’s not the typical reason for getting into a lease to own. You can test drive a home, maybe you just don’t like it. That way you’re not tied to it with a mortgage or having to buy it and sell it with potential realtor fees.
But in this case, make sure that you are following through if you said you were going to get this in six months, 12 months or within five years. Typically, we recommend giving yourself one to five years to find a bank loan because that’s usually enough time. Make sure you’re following through with credit repair, saving for the down payments, and getting your financial house in order. There’s a lot of nonprofit financial organizations, like the village Family Resource Center, that we recommend and work with that’s here locally, where we are in Fargo, North Dakota. Or it could also be going through a financial independence/Dave Ramsey style program of just getting your financial house in order.
So there you go. The five least known problems and solutions for homeowners. Number one is the trust; challenging them and making sure that they have credibility, just like they’re trying to vet you. Number two, the bad homes; don’t get into a home that’s going to need a bunch of work unless you are planning on improving the home yourself. Number three, make sure the paperwork is in line. Get someone to review it and make sure you’re asking questions, getting everything documented, and if you can, get an attorney to review it.
Number four, is make sure that it’s actually a right fit for you; don’t just get into a lease option or contract for deed if it’s not right for you. It’s meant to be a bridge so that you can get into a home now without having to wait. The last is follow through on what you said you were going to do to make sure that you don’t forfeit your income.
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