In our 2020 market, with lower inventory and increasing home prices, we still have participants who are missing out. One group missing out is the buyers who do not quite have the buyer profiles needed to be able to purchase at this time.
This could be from either a lack of a down payment or credit challenges or both. The other group is the sellers who have been sitting on properties for a long time and are unable to sell them due to a variety of reasons, including a soft market.
A rent-to-own arrangement could be the answer to both the buyer and seller situations.
The way this works is a longer-term purchase arrangement is set up between the buyer and the seller. This could be, say, three to six months or longer.
During this time, the buyer fulfills certain requirements to get into a buy-ready position. In exchange for this, the buyer will be able to purchase the property at a predetermined price.
There are benefits and risks to the buyer and seller, but if the transaction goes according to plan, both will come out ahead.
The buyer can get a taste of homeownership where they would otherwise be paying a landlord each month.
If the agreement calls for monthly rent payments to go toward the down payment on the property, that means the buyer would have to come up with less cash later in the transaction. And, not to mention, money going towards a down payment and investing in a home makes more sense than “losing” it to rent each month.
They could also benefit from being able to pay below-market prices on a property that may be likely to see an increase in price.
The buyer’s downside is that if they are unable to get where they need to be in the time allotted to purchase the property, then they lose all of the money that they have put into the transaction.
For the seller, the benefit is that they start receiving a stream of income from a property that might otherwise have sat vacant.
The drawback is that if they put all of their proverbial chips into a buyer who, after entering the contract, is either no longer able or willing to fulfill the terms of the agreement, the seller has to start the entire process with a new buyer.
Another risk that the seller may have to deal with, especially in a flat market, is declining home prices. The property still needs to appraise out.
Vetting out the right buyer may become a challenge for the seller, and I can help.
While there isn’t a surefire way to predict what any buyer is going to do in the future, past credit history (and more specifically, the recent history, as in the last year) is a good place to start.
If you want me to work with you and your clients to set up financial checkpoints along the road to homeownership to make sure they are on track, I can do that.
The last thing anyone wants are surprises as you move down the road in this process.
If you or your clients have any questions about how to finance a rent-to-own property, please feel free to reach out. I’m just a call or email away. I would be happy to help determine what may be right for your clients, given their financial circumstances and goals.