Rent to Own: “Rent-2-Own, $500 move you in”. That’s what the sign says.
Rent to Own, the easy way to home ownership for the borrower’s with poor credit or no money down. That is what they sellers of rent to own deals want you to believe. The little yellow road sign written in black magic marker says “Rent 2 Own, $500 moves you in”. It sure sounds easy. I can have the American Dream even though my credit has been damaged due to no fault of my own. This all sounds too good to be true; it may or may not be depending on your credit and financial status.
There are 2 basic forms of a rent 2 own. There may be others, but these are most common.
Option to purchase contract: The seller sells the renter an option to purchase the property on a set date at a set price. There is no transfer of title. The renter pays the seller money for that option to buy. If you do not close at that time then the seller keeps the option money. If you do execute the option on that date and price then you close on the property at a title company like any other real estate deal. There is very little risk except the contract option money. Options can be from $1000-$15,000 on a typical option agreement in our area. The worse the deal for the buyer the lower the cost is how that usually works. A lot of shady characters are doing these because there is very little recourse and very little legal documentation. The bandit signs on the side of the road like “We Buy Houses” guys are big on those. They don’t actually buy the house. They wrap the whole deal in an option contract.
The finacial risk is small, usually equal to a security deposit so most renters do not check these out closely. The house can go into foreclosures, other leans can be recorded or the seller may not have an actual interest in the property to execute the sale contract. The more common risk for the buyer is that they may not be able to get a loan by the strike date to execute a purchase of the property. If you cannot close on or before the date on the option, then the buyer looses the option money. Most option sellers’ will then just sell the renter another option and downward spiral continues for another cycle and more money from the renter.
Land contract or Contract for Deed or Wrapped Mortgage deal: A Land Contract may or may not have a wrapped mortgage involved, but these have been described as such. This is the oldest form of real estate transfer known. This is how MOST land transactions were done before the 30 year mortgage came along. These work a little different and are much more complicated. These are actually a transfer of title between parties. The title is held in escrow at a title company or escrow agent. It is not recorded at the county like most sales in Colorado. This is a legal sale of the property between parties that can be adjudicated in court. The cost of these usually require $10,000- $30,000 from the buyer to close the deal. The title will be recorded when the renter/buyer fulfills the obligations outlined in the contract. This usually requires a new loan and the pay off of the original contract for deed.
The problem is that the deed is not recorded. If anybody records a deed ahead of you then, they own the property not you. You have to be dealing with a very solid seller. I have done these as the seller but my finances are strong. I have the financial strength and credibility to hold the deal together or pay off any claims against the property if those arise. In the 80’s they put people in jail for these deals going wrong. There were sellers, wrapping, double wrapping and even triple wrapping these mortgage deals until the property could no longer support the transaction. The renter has very little way to verify who they are dealing with on one of these expensive deals.
None of these transactions are illegal or unethical if every body does what they promise. I have done both types of transactions described here. I rarely conduct these types of deals because I am a licensed real estate agent in Colorado. I have NEVER completed one of these transactions on behalf of a client. I was always a party to the contract. All parties have huge recourse on me personally if anything goes wrong or even appears to go wrong. A competent attorney should draw up any documents.
For the renter there is no easy fix for credit problems and there is no easy way to the American Dream. Keep your monthly expenses as low as possible, including rent, pay your debts and bills off and save for a down payment. That is the real way to the American Dream of home ownership.
You can learn more about these and other uncommon rental transaction at our web site www.4RentDenver.com
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