Risks: RTO/FSBO

The Risks of Rent To Own and For Sale By Owner

Before you make the move, you should know the full risks associated with rent to own and for sale by owner properties.

The internet and social media are powerful tools that are available to practically everyone. The power and reach of the internet leads some people to think they can save a lot of money by selling their home without a Realtor. Others may think purchasing or selling their home via a rent-to-own agreement is a better option than utilizing a licensed financial services company. The Coldwell Banker® System uses the power of the internet to improve your home buying and home selling process. It also strives to empower you by providing the up-to-date tools and information you need to choose what is best for you and your family. You should fully understand the possible risks of Rent-to-Own and "For Sale By Owner" before committing to either.

Rent to own for buyers

At times referred to as a lease-purchase or lease-option contract, rent-to-own is a lease agreement that includes an option for the tenant to buy the subject property after some predetermined time period. It is most often utilized by people who lack sufficient funds for a down payment or who have some issues with their credit.

Higher living cost

Usually a portion of the monthly payment to the landlord goes toward being a down payment for the ultimate purchase. Only the amount above fair market rent for the property goes toward the down payment. This puts the buyer/tenant, who already had some financial difficulties, into a situation of paying higher housing expenses for the same living accommodations they could otherwise afford without the purchase option. Rather than being placed in the potential home buyer's savings account and drawing interest, the money goes to the property owner's account. The lease-purchase agreement is costing the renter more money to accumulate the same down payment amount.

The time period varies, but is typically two to five years. For the purchase option, the renter pays an option fee. If the renter chooses not to exercise their purchase option at the end of the agreed period, it is unlikely they will get any refund of money. The amount paid above rent typically can only be used by the potential buyer for the purchase of the house. If the tenant is still not in a position to buy due to bad credit or not qualifying for a mortgage due to income, they will lose their option to purchase and the additional money paid toward a down payment.

Why buyers still rent to own

In addition to locking down the home in the location they want, potential buyers are able to build or repair their credit while they live there. They can also lock in the sales price and terms with the option to purchase contract. If the value of the property increases in that time, the buyer has accumulated some equity prior to their actual purchase. Unfortunately, it is also possible that values for the area could remain flat or decrease during the same time period.

Other risk factors

If the potential buyer is just one day late with their monthly rent payment, most rent-to-own agreements void the additional purchase option credit for that month. Repairs and routine upkeep that are usually the responsibility of the landlord become the responsibility of the tenant. The renters have higher monthly payments, more responsibility, and some added financial risks. There have also been cases where the seller had a mortgage on the subject property and failed to make the payments. The bank foreclosed on the property, and the renter was forced to move.

Rent to own for sellers

The common perception is that offering alternative financing gives a competitive edge to sellers by increasing their potential buyer pool. While many aspects of lease options may appear to work in their favor, there are also risks and drawbacks to the home sellers who find themselves locked into being a landlord for two or more years.

  • Quality tenants are always difficult to find, even when they have an option to purchase and stake in the house.
  • If the real estate market declines, the renter may not be able to close on the purchase. The seller is stuck trying to sell the house in a down market, possibly for less than they could have a couple of years earlier.
  • There is a very real possibility for damage to the property and a long, difficult legal dispute with the tenant. The longer any contract takes to close, the more likely there is to be trouble.
  • The seller does not get a lump-sum payment for several years and will have trouble qualifying for a mortgage to purchase their next home if they still have a mortgage on the first.
For sale by owner (FSBO)

A newly licensed real estate agent has more knowledge about marketing homes, negotiating contracts, and the laws governing real estate transactions than home owners who have bought and sold several houses in their lifetime. The agent has completed mandatory training and passed state exams on each item. They also work under the guidance and supervision of an experienced broker in charge. The Coldwell Banker® brand also has proven systems, in-house training, and experienced mentors for new agents. But some sellers still want to try selling their home without using a Realtor. Anyone considering "for sale by owner" should ask themselves the following questions:

  • Is just a sign in the yard and maybe listings on a few free-to-advertise websites sufficient marketing to bring top dollar for your home?
  • Are you ready to field all calls and inquiries from potential buyers and curious neighbors?
  • How much time will you spend qualifying buyers and scheduling showings?
  • Will you work with buyer's agents? If so, how much compensation are you willing to offer them?
  • Do you have a realistic understanding of the value of your property and how it compares to other houses that potential buyers will be viewing?
  • Do you know your legal responsibilities to potential buyers and anyone under contract to purchase your house?
  • Can you remain calm and objective in negotiations with potential buyers who may insult your home and be critical of its condition?

That last one is more important than most people realize. Having an experienced Coldwell Banker brand agent working on your behalf in negotiations is of substantial value. Even with all the advancements in technology, real estate is still a people business. Selling and buying a home is a process with many aspects and moving parts. Our agents improve your negotiating position and make it easier for you to achieve the results that you will feel good about for many years ahead. Rather than begin this important process on an uncertain path and shaky legal ground, contact me today to ensure you'll have every reason to expect the best.