The Crossroads of Renting or Owning Real Estate
An interesting thing happened while visiting a friend at his place of business last week. He said, “What’s this?” A form had come over his fax machine and was a verification of employment for one of his employees.
I assumed that he must be applying for credit to purchase a home. It’s not unusual so I just recommended the he verify with the employee that this mortgage corporation is authorized to receive the personal information. A half hour later I received a phone call from the boss saying his employee was applying to rent to own and he asked what I thought.
In a market like this I couldn’t believe anyone would do such a thing. I asked several questions. Is his credit bad? Is he getting over foreclosure? Bankruptcy? Had he applied for a mortgage with a legitimate, didn’t get their license off of the back of a cereal box, mortgage broker?
It turns out this buyer is a regular guy, held the same job for several years, decent credit and he just doesn’t know that there are probably smarter ways to get a roof over his head in a market like this.
I don’t doubt that there may be, for someone, a valid reason to rent to own or lease option a home. What I do doubt was whether this was the best choice for this man and his wife. Their ultimate goal was home ownership but they were getting derailed by rent to own and it could cost them a bundle lost time, opportunity and, of course, money.
To begin with, these buyers hadn’t looked in a while and things have changed dramatically. The prices of homes, especially entry level pricing are at very affordable levels. What wasn’t available under $200,000 in many areas is now available well under that price. Sure, there are short sales and foreclosures to contend with, but there are also regular real estate transactions that happen every day.
Real life still moves along even when it’s not the best time to sell. People get relocated to other parts of the country, couples divorce, spouses pass away and their real estate becomes available due to circumstance and motivation to sell. When sellers have the equity and price their real estate competitively it creates fantastic opportunities in the market.
What are the risks with renting to own real estate? Basically every risk that any consumer has for renting a home comes into play.
Let’s just say that Joe Buyer, absolutely no relation to Joe the Plumber, decides to rent to own a home. In a market that is experiencing foreclosures and short sales how does he know that the lease payments he makes to the seller are going toward a home that isn’t sporting one of those new fangled upside down mortgages? How does he know that the seller is making any mortgage payments at all?
It could be only a few months into the lease when the foreclosure fairy calls on the “real” owner and the tenant/buyer ends up out of their deposit or any imaginary equity they think they may have accrued per their agreement.
Depending upon the location of the home, the worst of the pricing decline may not be over. Prices could still be wavering plus there’s still no shortage of existing home supply in many areas. If Joe Buyer chooses to rent to own, prices can still decline and he could be tangle in a contract missing other great opportunities that come up.
There are a few things that first time home buyers should know about buying vs. rent to own in this market. You make your money getting into the market by owning homes not renting them and “maybe” buying them.
First, in spite of all of the grim news banks are still lending money to folks that have decent credit or who clean up their credit. Yes, you will have to prove income and pay your bills to qualify, just like the good old days. The golden money goose is dead so you’ll just have to settle for a conventional or FHA goose.
Second, interest rates are remarkably low. Taking advantage of low interest rates can save you tens of thousands of dollars over the life of your mortgage.
Third, the first time home buyer tax credit is $7,500 and you qualify even if you’ve owned a home before. You just need to be purchasing a home and not have owned a principal residence in the last three years. This isn’t a gift from Uncle Sam, it’s a tax credit which is essentially a long term interest free loan that is meant to be paid back over 15 years. You can ask a lender, CPA or Google for more info.
Fourth, the FHA mortgage and the USDA Rural Development Loan are making home purchasing possible with less of a down payment for qualified buyers. If you’re looking at Lehigh, Golden Gate Estates or other rural areas ask about USDA.
Just about any good mortgage broker could review a first time buyer’s credit, give them an action plan to clean up credit dings, raise their credit score and get them on the road to true home ownership. Even if it takes a few months for the buyers to get the credit ducks in a row it gives buyers time to save even more money for additional down payment or savings.
The Bonita Springs real estate market has some fabulous opportunities. It would be a waste for buyers to not take advantage of the ultra low interest rates and government incentives just because they didn’t know about them.
Real Life in Bonita Springs is a project by Chris Griffith dedicated to writing useful blog posts for consumers about the Bonita Springs, Florida area. Find out what it is really like to live in Bonita Springs, Florida by reading about our fair city. You’ll get the latest in local real estate information, Bonita Springs real estate market reports and a little bit of humor. If you have topic ideas, feel free to request a story about the idea, after all, this site is just for you.
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