At the end of her one-year lease, Mary Pitman, a 54-year-old Vero Beach nurse, decided she liked the house so much she wanted to buy it. She offered her landlord a lease/option deal and, in December 2007, she closed on the house — with no money down.
"My pitch to him was he would still own the house but have none of the expenses," she says. "Although I didn't have a portion of my rent applied toward the purchase, I had proven myself to be a reliable, responsible, trustworthy person."
Under the terms of the deal, the landlord gave Pitman a 100-percent, 30-year loan at a fixed rate of 6 percent. He was holding her last month's rent and security deposit, which he applied toward Pitman's closing costs. She pays her own homeowner's insurance and the property taxes, which, together with the mortgage, comes to around the same amount as she was paying for rent.
"Everybody won. And the best part was that I didn't have to move," she says.
Lease/option real estate deals, also known as rent-to-own or lease-to-buy, were common in the 1970s, when housing was cheap and it was a buyer's market. But they're making a comeback, because they answer some of the problems inherent in today's shook-up real estate market.
"You have sellers who won't back down on their price, for a variety of reasons," says Brendon DeSimone, an associate with Paragon Real Estate in San Francisco. "Also, you have buyers who just can't come up with the absolute requirement of 20 percent down. So, both the buyer and the seller win in this scenario. It is not rocket science to put this together."
Adds Marian Anthony, a Carlsbad, Calif., real estate agent who specializes in helping homeowners facing default, "The rent-to-own technique is a possible solution for thousands of vacant homes to regain not only the curb appeal, but also restore community values."
There are lots of permutations, but in a typical lease/option arrangement, buyer and seller agree on a purchase price for the house and the term of the lease, normally one to three years. The buyer usually provides a non-refundable down payment which is much less than the amount a bank would require. Often, the buyer pays more each month than the going rate for a rental, with the excess amount credited toward the down payment if he goes through with the purchase.
In the best-case scenario, at the end of the lease period, the renter has accumulated enough cash for the down payment, qualifies for a conventional mortgage, and gets to remain in the home. Of course, the devil is in the details.
Real estate professionals tend to be negative toward lease/options. Says Kelly O'Ryan, an agent with Coldwell Banker in Lexington, Mass., "I have never seen one of these deals get off the ground. The buyer never wants to pay the monthly payments required to make this a good deal for the seller. If the seller is carrying a heavy mortgage, the numbers just never work."
But pros who have done these deals disagree — especially in today's failing market. Says Tara-Nicholle Nelson, a consumer educator for Trulia.com, a real estate listings and information service, "They can provide a great strategy to get a tough-to-sell home off the market, defer capital gains taxes, or otherwise gain a tenant who is highly likely to take great care of your property (because they're likely to think of it as their own home-to-be)."
In the next two installments of this three-part series, we'll take a careful look at the pros and cons of rent-to-own real estate agreements. Be assured, there are plenty of pros and cons.