The Pitfalls of Rent to Own

With all the doom and gloom of the recession it has become harder to get mortgage finance. When this happens people will look at all sorts of options to try and buy their first home. In this article I want to deal with one option that seems to be raising its profile again, the dreaded Rent to Own.

The people looking doing these rent to own options are looking for a renter with steady income who lacks the deposit and ability to qualify for a mortgage.

Let me give you an example of a proposal put to a client of mine. The cost of the property was to be $ 260,000. The owners had purchased it for more than $ 50,000 less than that a couple of days earlier. The proposal was to pay $ 300 per week, of which $ 80 a week was their deposit. They had two years to organise mortgage finance to buy the property. Over 2 years they would have a deposit of $ 8,320, 3% of the purchase price. This is not enough in the current economic environment to satisfy any banks deposit requirements for a home loan. Guess who keeps the deposit if my client couldn’t organise a mortgage? So as you can see it was set up to fail with the seller making money on the deal.

Other things to consider:

• Who pays for the repairs and maintenance?

• What happens if you are unable or late making a payment?

• Can you get your money back should your financial situation change and you are unable to fulfil the contract?

• What happens if the seller experiences financial difficulties and has a mortgage on the property?

All these things again usually result in the purchaser losing money.

My advice, run away. The rules of the game are set up so that you have some significant hoops to jump through to buy the home, and if you miss any of them the extra money you are paying is lost to the seller.