Rent to Own in the New Economy

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Dear Monty: We want a rent-to-own agreement on a house we jointly own with my husband’s mother. The place is owned free and clear. We want to buy her out in about two years. What are both parties’ legal obligations in a rent-to-own situation? Do we have to give her a down payment? How will we handle real estate taxes? What fees do we have to pay her monthly?

Monty’s Answer: The U.S. economy appears resilient. According to many business media outlets, unemployment and inflation are down, and consumers have more in the bank than in the pre-COVID-19 period. This writer believes that rent-to-own will become more popular as interest rates rise, as it may compete favorably with new construction, which is booming.

Is A Down Payment Necessary?

As you already are a partial owner, you may not need an additional down payment. You likely know the costs associated with owning the home. These costs include real estate taxes, special assessments by the municipality, property insurance, utilities, maintenance, and repairs. You can negotiate the range of market rental costs. For example, if you paid all the ownership costs, how would that compare to a fair market rent or some higher number for a down payment set aside in a rent-to-own lease?

The Potential Rent-To-Own Risk

The rental amount includes an option fee and an agreed-upon amount of money set aside or credited by the seller for the buyer to accumulate a down payment over a period. If the tenant/buyer exercises the option and purchases the home, the option fee and the accumulated set-aside charge apply against the fixed purchase price. If the buyer does not exercise the option, the rent-to-own provisions provide a nonrefundable set-aside and option fee.

A Regular Lease With An Option To Buy

Because you already own an interest in the house, it is unclear if there may be other options instead of rent to own. Your percentage interest in the home is vague, but a 30 percent interest in a $200,000 free-and-clear house is $60,000. That is substantial equity for a down payment. Can you support a $140,000 mortgage? Consider a simple option to buy for a specified price on a specific date.

Lenders will have different ideas about how they want to structure the agreement. Visit with several independent mortgage lenders before you decide what route to take. The legal obligations you asked about will be in the contract between your husband, you and your mother-in-law. When you agree, seek a real estate attorney to draft the documents.

Challenge Your Thinking

It also needs to be clarified why you believe a rent-to-own agreement is the best method. Having poor credit or no job is one reason a home seeker will enter a rent-to-own agreement. When dealing with mom, rather than an outside entity, there may not be a nonrefundable set-aside and option fee.

If you choose rent to own, here are several newer options that aim to fix the scam stigma, as many rent-to-own products are predatory by nature. Each of these companies will own the home you are renting. This writer has not been a customer nor investigated these companies, so you must judge for yourself as each is likely unique: Divvy.com, Landis.com, HomePartners.com, and Verbhouse.com.