Wednesday, June 24, 2009

Rent to own - or rent to survive?

The “rent to own” scenario I have been preaching about for the past year has finally been gaining in strength, yet I continue to have some real estate professionals express concern to me about the negatives.

The above link is to still another story about how builders have begun to enter the foray. They see the same things I do. There are a number of potential buyers out there that have enough for a down payment and to handle a reasonable monthly mortgage, but do not have enough credit to get a mortgage or perhaps need a few more months to reach that point. But they would “own” now if not for those conditions.

Sellers have reasons to “rent to own”. Not only would a “tenant” cover their mortgage cost, but one with the desire and strong possibility of buying the property is going to take much better care of it on a day-to-day basis. In most cases, it frees up the seller to move elsewhere, whether a move up, down, or laterally.

Yes, I understand there are some risks on both sides. A “tenant” could suffer a job loss or a severe strain in this economic climate and have to vacate, thus resulting in the major expense of the current owner. An owner could suffer a similar economic blow and force a tenant out. Several realty agents I have discussed this with feel that these possibilities make a rent-to-own scenario too risky for them. I can understand that, even though the concern is really that the realty agent does not want this to reflect on their services if things go wrong. Yet, these same realty agents seem unwilling to negotiate an exit strategy into a contract.

If a rent-to-own tenant suffers a financial setback, he/she/they could have a 60 day out clause, perhaps forfeiting a deposit paid initially and designed to go toward eventual ownership. This would provide a period of weeks for the “seller” to either find another tenant or consider alternatives such as an auction for at least the balance of the mortgage. Depending on the amount remaining on the mortgage, there could even be room for the seller to then profit while being done with the property and yet give a fresh buyer a great deal. If an owner suffers a setback, the tenant would be covering the existing mortgage.

For builders, they see the value of having tenants in units which have already been built and cost money to maintain if no one is in them. As more of them take to this idea, it could mean the difference between builders staying in business or not to have tenants in as many of their already built homes as possible.

My message to potential buyers with credit issues is to strongly consider this possibility. Builders are worth checking with, especially since there is a likelihood of a new unit and fresh warranties. My message to sellers is to weigh the risks of being able to get out from under a mortgage and move on vs. staying in your current situation. And my message to realty professionals is to consider ways to make this system seem better so that you don’t lose your commissions to a local builder.

It appears there are potential buyers with the financial capability but without sufficient credit. In many cases, the financial capability could win out. For everyone.

1 comment:

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