Cover story: Lease-to-own presents opportunities

Renters who are monitoring local home prices and interest rates may be eager to buy, but their credit history, lack of savings or employment history may keep them from qualifying for a home loan. Other renters may be reluctant to buy now, fearing that home prices have not yet hit bottom.

Homeowners who have been unable to sell their home — or who are waiting for prices to rebound — may have become unwilling landlords because they are out of options.

A lease-to-own arrangement offers a solution for both renters and homeowners who find themselves “stuck” in the current housing market.

Lease-to-own arrangements can be complex and require the assistance of an attorney or at least a real estate agent experienced with this type of transaction. In any case, both the sellers and the buyers need to fully understand the financial implications of a rent-to-own contract.

“When I shepherd people through the lease-to-own process, I find that many buyers choose not to do it when they realize that the arrangement is 100 percent different than what they thought it would be,” says Gerry Dunn, an associate broker with Weichert, Realtors in Potomac. “People sometimes think that if they rent a home for $2,000 per month and set a settlement date in two years that they will have accumulated a $48,000 credit for a down payment. But when rent-to-own buyers apply for a loan, the lender will only allow a credit for the amount of rent paid above the market rate for rentals. No landlord or lender would accept the entire month’s rent as a credit toward buying the home.”

As long as renters understand the rules of lease-to-own arrangements, there can be some advantages for them.

“Typically, renters who choose a rent-to-own contract either don’t have the down payment money, have debt to pay down or have credit issues that need to be resolved before they can qualify for a loan,” says Alisa Sampedro, a Realtor with Coldwell Banker Residential Brokerage in Leesburg. “Buyers are able to lock in the price and the terms of the property they want to buy and receive a rent credit during the time they are renting the home. Renters also have the advantage of ‘trying out’ the house before they buy it.”

Mrs. Sampedro, a real estate investor as well as a Realtor, has negotiated multiple lease-to-own contracts for her own properties and for both buyers and sellers.

“I typically arrange for a significant rent credit so that buyers become accustomed to the monthly payment they will be making when they take on a mortgage for the home,” says Mrs. Sampedro. “For example, if a home has a market rate rent of $1,750, I will have the renters pay $2,100 per month and credit them as much as $500 each month so they can make a little money from the arrangement. That way, they actually have a significant credit when the lease ends in two or three years.”

Mrs. Sampedro says that each lease-to-own contract is negotiable and should meet the needs of both buyers and sellers. She says while rent credits are expected, they are not required. She recommends that renters write separate checks for the market rent and the additional rent so that the credits are transparent at the end of the lease. Another option is for renters to make an option-to-buy deposit, which allows them to buy the home at a specific price at a specific time.

“I recommend that the renters meet with a mortgage lender at the beginning of the lease-to-own agreement so that they can understand what it will take for them to qualify for a loan, such as cleaning up their credit or saving more money for a down payment,” says Mrs. Sampedro. “Buyers need to understand everything about the agreement so they are prepared for every possibility.”

Most importantly, buyers need to realize that if they choose not to buy the home at the end of the lease, they will not be given a “refund” of the money they have accumulated toward the purchase of the home. The money will only be returned to the renters in the form of a credit at settlement when they buy the property.

“A lease-to-own arrangement can work well for people who are comfortable in the property where they live and would like to buy it,” says Mr. Dunn. “They also need to be confident that their income is going up so they can qualify for the loan when the settlement date arrives, and confident that the home will appreciate or maintain its value. A good example for this scenario would be a family that wants to move into a particular school district but cannot afford it yet, or a recent college or law school graduate with the potential for increasing income.”

Buyers have the advantage of locking in the price of the home at the time of the lease, which has the potential of allowing them to purchase it at a below-market price in two or three years.

For sellers, the advantages in this current market are to have a ready-made buyer in place and to have a long-term renter to help maintain their cash flow, particularly if the renters are paying an above-market rent in order to accumulate a credit toward buying the property.

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