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Jonathan Dalton
REALTOR
ePro, SFR
602-502-9693

Why Rent to Owns Are Terrible Options for Buyers With Bad Credit

Why Rent to Owns Are Terrible Options for Buyers With Bad Credit

Jonathan Dalton, Phoenix Real Estate AgentLease options, a.k.a. rent to own homes, sound enticing. Rather than paying rent strictly to a landlord without any long-term benefit, a portion of your rent and a portion of your deposits are set aside for your eventual down payment.

What most people considering rent to own homes miss is the 800-pound gorilla sitting in the room: at the end of the lease period, you’re going to need to qualify for a loan to purchase the property. (Exception: if the seller is willing to finance personally, but if they were willing to do that you probably would go down that road up front.)

Considering rents on most lease options are higher than the going market rate (the owner usually sets aside the difference), there’s little involved that a dedicated renter can’t do on their own. Simply rent and set aside the difference each month. Save it yourself rather than depending on the owner to hold it.

At the end of the lease on a traditional rental, if you elect not to purchase you simply go find another property. At the end of the lease on a lease option, 99 times out of 100 you’ll be forfeiting all of the extra money you paid in, further delaying your opportunity to buy a home.

Buying through a lease option should be a person’s absolute last option.

[tags]Phoenix real estate, lease options[/tags]

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  • This is a very often overlooked problem. I talk to quite a few people who are a few months away from their leas period expiring and they say they are ready to purchase, but their credit still stinks. Now what?

    Anybody serious about this option needs to make sure they have a credit improvement strategy. Talk to a lender BEFORE you sign a lease to own. Ask that lender where your credit needs to be in order to qualify for a purchase and develop a strategy to get there.

  • Greg Brown says:

    While many of the things you say are true renting with the option to buy can be the best way to get into a home today that you would like to buy in the near future. It is true that at the end of the lease period you are responsible for getting your own mortgage. In efforts to help as many people as possible to realize the American Dream of owning their own home we have developed a rent to own program that takes all of this into consideration. What we have done is partnered with a credit repair specialist who is also a mortgage banker. Before we have any tenant buyer sign a rent to own agreement, we have our credit repair specialist review their credit and take a snapshot of where they are today and where they need to be at the end of the year. If we don’t feel they have a chance to get the mortgage at the end of 1 year we will pre-negotiate an additional year on the lease. If at that time we don’t feel they will be able to buy the house they are considering renting with the option to buy we will let them know and help guide them in the right direction. In conclusion, there are many benefits to renting with the option to buy because it does afford the opportunity to become a homeowner, however, it pays to be as realistic as possible in the beginning and to absolutely consult with a credit repair specialist or certified lease purchase consultant.

  • That’s a pretty good setup, Greg … if the tenant/buyer is fully informed about the process and the challenges they’re facing that’s a different story.

    Most don’t seem to understand there’s a loan qualification waiting for them at the end.

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