Rent-to-Own & Land Contracts

Renting in this real estate market can get pretty costly and the cost to purchase a home is about the same amount as a monthly rent payment. Some people think their only path to home ownership is a rent to own situation, but if you can swing it, home ownership is easier than you think. Before you decide to go down the path of rent-to-own or land contract, take some time to get a financial check up with one of our lenders by clicking here.

In the meantime, this article can help you get the info you need to make an informed decision:

A land contract is a situation where the current owner of the home acts as the mortgagee (the "bank") for a short time with large payoff at the end of the term. At the time of close, you are the homeowner and the previous owner is not the landlord, they are the "bank". Your name is on title and a lien is placed on the home (just like a bank would) for the mortgage debt. You are responsible for property taxes, you even have the right to sell the home.

When selling a home on land contract, the seller typically wants 15-20% down, a short-term contract (typically 3-7 years) with a balloon payment at the end, and an interest rate of typically 6-11% amortized over a period of 15-30 years. For example (for estimate purposes only), on a sale of $190,000 with the seller offering 6% interest over 30 years on a 5 year balloon you'd be looking at: $38,000 down, $800 per month for 5 years, and $120,000 due at maturity.

A land contract isn't intended for the seller to be "the bank" for the life of the loan. And the seller knows you won't have $120k at the maturity of your loan. During the time of the contract it is expected the home grows in equity and your financial situation betters. Within that time frame you should qualify for a traditional mortgage to satisfy your debt to the land contract mortgagee. Usually this means a better interest rate and a lower monthly payment (or a shorter mortgage term).

Each land contract has a specific set of terms. Be sure to ask your realtor and title company for the full detail of the land contract terms being offered.

Rent to own is typically confused with a land contract, but is completely different. You don't have the rights to the property you're living in. You rent the house and have no rights to make changes, obtain mortgages, or utilize any other benefit of home ownership. There are 2 different types of rent to own agreements: lease with option to purchase and a lease with intent to purchase.

A lease with option to purchase and is exactly how it sounds. You lease the property and you have the option to buy the home at the end of the term. You put up option money to protect your interest in purchasing the property. A lease is drafted to assign responsibilities to each party and the property. And the purchase details (what, when and how much) are laid out. The option money is typically 3-5% of the expected purchase price and is non-refundable. You negotiate the terms of the lease, which is usually enough to cover the increase in taxes and the mortgage of the home- sometimes more, depending on what the seller wants to recoup for their inconvenience. The seller acts as the landlord and you are privy to tenant rights based on what is written out in the lease in place and the state you're living in. Sometimes option money is a fee collected by the seller to cover the inconvenience of the process. But most of the time the option money is applied to the purchase price of the home. It all depends on how you negotiate the contract. If you don't fulfill your end of the lease w/option contract, the homeowner keeps the home and moves on with selling the home to another interested party.

Lease to purchase is very much like a lease with option to purchase, except at the end of the lease term you are required to purchase the home at the end of the term. And the seller can seek performance or damages in the event you don't purchase the property.

While a rent to own or land contract situation might help you into home ownership at the time being, the stakes are higher. If there is a mortgage on the property, you have to depend on the seller making their mortgage payments and not falling into foreclosure. If you're a land contract holder, you technically own the home, but mortgage liens are recorded in succession and the 1st lien holder trumps the land contract. You could find yourself homeless and filing a lawsuit to protect your interest in the property. You should also consider the real estate market. You might find the home loses value instead of increases in value over the time of your lease term. If your obtaining a mortgage, and the appraisal comes in lower than the price you negotiated, you will have to come up with the difference in value or you could lose the time, efforts and money you've already put into the home. The seller isn't going to reduce the price because value is lost over time; because they could have sold for market value to someone else at the time they originally had the home offered for sale.

If you have to land contract or rent to own a home, be sure your agent and title company protect you contractually. But before making that decision, know your financial situation; you might be a few months away from a traditional mortgage- and a little less of a headache!

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