Expert: Jessica Bryan - 9/12/2005

Question
Hi Jessica, I'm relocating to Las Vegas and am seeing a lot of companies advertising a Lease/Rent to own option. I was wondering if this may be beneficial to me. I make a very good salary but don't have much $ to put down for a traditional mortgage. Plus my income to debt ratio is too high for me to obtain a decent mortgage loan at this time. What are the drawbacks/benefits (if any) for me to go this route? Thanks in advance!

Thomas Morris

Answer
Hi Thomas;
This method of buying a home is sometimes advantageous in a situation such as yours. Since you probably already know the benefits of owning vs. renting a home I will address the drawbacks.  Many sellers will not entertain this option since they are placed in the position of "landlord" and don't recover their money right away.  They also don't like the idea that the price is locked in at the point of contract and while they are holding on to the home waiting for you to take over ownership the price could go up and they lose out on that profit. If they need to sell to buy another home, they are less likely to do a lease-to- own option.  It is still possible, but they also have to have the right ratios.  This only means that your choices are limited by which homes (and sellers) will allow this option.  Since this is not as good of an option for the Seller, you are more likely to find a seller to agree to a lease-to-own if they are desperate to sell and if the home has been on the market for a long time.  This sometimes implies that the home is overpriced, a bad buy, in bad condition, has structural defects or design deficiencies, among other things. I wouldn't want to buy a home like that unless I was relatively sure of resale value and got it at a good price.  

The next drawbacks I would like to discuss vary from seller to seller depending upon negotiations and the signed contract you agree to.  The seller may want more money for the home, a higher down payment, a non-refundable security deposit, a higher rental fee, might be less likely to repair and/or replace items in the home; may be more rigid with conditions of sale; and may not accept anything that isn't on his or her terms since he knows that he has you 'over a barrel' so to speak.  Don't be too hasty to accept terms that are unfair or unreal.  You can always try to save for a couple of years and buy a home outright. By the time you pay enough for the down payment you might actually have done better to buy at that future time!  On the plus side; you have frozen the price and will potentially get the home at a better price than what home values are currently when you pay enough to secure a loan and own the home.

One more thing; don't wave your rights to inspect the home and find out all of the history of the home.  Sometimes, people are so grateful to find a situation where a seller accepts a lease-to-own option that they forget that they are still purchasing and should go through the same steps as they would if they purchased outright.  Make sure to check for wood rot, termites, structural issues, mechanical malfunction, and roof issues. Hire a competent home inspector.  Check the most recent survey and if necessary have a new one done. Make sure that title is clear and that it can be delivered without any encumbrances or liens on the property.Your contract should also be contingent upon the home appraising at the agreed upon price and pay to have an appraisal done.

I hope that this helps with your decision.

Sincerely,
Jessica Bryan
Managing Broker
House to Home Realty Services