No Standard Terms
In theory, “rent-to-own” is a tailor-made strategy for today’s housing market, where lots of would-be Buyers have good cash flow but lousy credit, and lots of Sellers are, well, eager to sell.
In practice, however, I’ve seen relatively few of these deals.
My guess is that the following factors are responsible:
–Although it’s a given that “everything in real estate is negotiable,” the lack of any standard terms for rent-to-own deals (at least as far I’m aware) makes them more challenging.
So, amongst other things, the Renter-Buyer and the Seller must agree upon: how much earnest money the Buyer is going to put up; how much of each rental payment is to be applied to the purchase price; what that purchase price is; and how long the Renter has to buy the home.
–Lack of upfront cash: most Sellers want at least some upfront cash in exchange for essentially giving the renter an option to buy, as well as to compensate them for the risk of getting their home back at some future point, vacant and possibly in (much) worse condition.
However, Buyers who have sufficient cash can get a mortgage — subject to their creditworthiness — at today’s record-low interest rates.
Speaking of creditworthiness . . .
–Purchase timetable: if the timetable is too soon, the renter may not have enough time to rehabilitate their credit, in which case they won’t be able to qualify for a mortgage to buy the home.
However, if the timetable is too remote, the risk is that housing values may have substantially changed, negating one side or the other’s incentive to do the deal.
–(Re)Establishing Price: is the sales price to be agreed-upon up front?
If instead it’s to be determined when the Renter-Buyer exercises their option, who is to determine it — and how?
The options include a formal appraisal; two formal appraisals (Buyer and Seller each get their own); or a Realtor-prepared Comparative Market Analysis (“CMA”).
For all the foregoing reasons, the “difficulty factor” negotiating rent-to-own deals is surprisingly high — which makes them tougher to pull off.
