Is Rent To Own a Dream Come True or a Nightmare?

Is Rent To Own a Fraud?
The answer is...it completely depends! Read on for tips to know what to look for if you are considering Rent To Own.

Being in the Real Estate world every single day, I see two different types of Investors.  
One that offers a fair rent, and makes purchasing a home feasible. These investors are usually trying to make a positive impact on the community, want to help others and are fair in their transactions. 

What about the second type?
These investors have big bucks and are trying to make more big bucks. They are usually corporations that in my eyes, take advantage of people.  

How do you know the difference?
#1 Monthly Payment
#2 Final Price of the home when ready to purchase
#3 Down Payment

1. Rent Payments Matter: 
If rent is too high, you are overpaying and could be using that money to save for a house, pay down credit cards, car payments, etc. instead of lining the pockets of the greedy.  A corporate business model tends to charge more for rent than they should.  If the house can rent for $2500 normally, they charge $3500.  The business is all about cashflow each month, which is the reason they invest.

If rent is too low, you'd think WOW, I found myself a deal! But the truth is big corporations, like casinos do not like to lose money!  Through high appreciation being tacked onto the purchase price of the house, you end up paying way more than you should, kind of a bait and switch.
In addition, if you leave the contract and don't buy, the down-payment for walking away is usually kept by the business. Plus, there may be fees you become responsible for if you do not hold up your end of the deal. Read on to understand more.

2. Purchase Price Matters:
The biggest worry I have when is comes to Lease With Option To Purchase, is that people don't usually read the fine print.  Most investors will add appreciation onto the house each year.  This makes sense.  Over the last two years, here in Colorado, appreciation has grown over 20% in some areas. But last year's gains are not normal and even if the market continues to rise, I am not expecting it to continue to appreciate another 20% that quickly. What does this mean?
Let me break this down and how it affects Rent To Own Opportunities.
If a home is currently worth $350,000, for every year the future owner doesn't purchase, the investor is adding on a 10-15% appreciation.  Let's say that an Investor is using a 10% appreciation.
2023: $350,000
2024: $385,000
2025: $423,500
2026: $465,850
2027: $512,700

The Buyer now has to be able to qualify for $512,700. If they are overpaying on rent, how are they going to save enough to qualify for that home loan? What if the house doesn't appreciate to 512,700? Most businesses have it outlined in their contract that if it doesn't appraise for the value, the buyer loses the time and money invested and just walks away.

What is crazy to me, is that over the last two years in Colorado, the tenant buyer probably got the better end of the deal with appreciation exceeding 20% in parts of Colorado, (40% in Boulder over the last three years)! But now in December of 2022, we don't know what next year's market is going to bring so that appreciation cost that the investors pass onto their future buyers REALLY matters. 

3. Down Payment Matters: 
Down payments can range from 0% to upwards of 30% depending on the situation, your credit and the lender. On a $350,000 home, with a 3% down payment, one would need $10,500 down. In five years, if that price is now $512,700, you will need additional funds to close. Even at just the 3% you are adding another $5000 down.

Tips From The Little Lady:
1. Rent should be equivalent to about what one would pay to own. Use a mortgage calculator to determine this. This prepares the future buyer for what those payments will look like and are not shocked when the price is $1000 higher a month
2. Down-payment should be about what one would pay to own (about 3%-4%)
3. Get a Lender involved (I know some great ones!) to help get you set up with a plan to purchase? Is it a 1 year, 3 year, 5 year plan to repair your credit?
4. Read the fine print. Are the investors charging 1%, 3% or 20% appreciation each year. 
If they are using a 3.5% and under,  those companies are usually not the big corporations making the wealthy wealthier.

The home pictured below is, in my opinion, is a great Rent To Own Opportunity and is located at 16185 County Road 100 in Nunn. It is a current listing of mine and the owners are considering a Rent To Own Option. Rent is $3500 (less than mortgage payment would be). Sales Price is $535,000 with only a 1% appreciation each year, allowing a purchase at any point in the next 5 years. Down Payment is $10,000 - $15,000.  It's a great deal in my opinion! If you are available, I am holding an Open House this Sunday from 10:00am-12:00pm. Stop on by, ask questions about Rent To Own, and grab some Hot Cocoa. Throw your situation at me, and let me help you find the solution.

To learn more about Rent To Own and have more questions, you can reach me at 303-709-4262 OR email Christine at thelittleladyinc@gmail.com.
I can't wait to help you started on your journey toward home ownership, and or your next investment!
Always on your side,
Christine Gwinnup
The Little Lady Sells Homes