Only 120 more payments and that house is all yours, baby!
Because I am a sucker for punishment, I have subscribed to my local town’s rental Facebook page, where local landlords and tenants meet up to talk about how they’re both worse than cancer on a stick. Landlords hate tenants because you damn bastards never pay on time, and tenants hate landlords because they won’t make reasonable repairs like demolishing the house and building a brand new one.
And I hate them both because I just can’t choose one.
Okay look. I’m a landlord, so I’m generally sympathetic to other landlords. I understand that tenants can be annoying. But for the most part, I find tenants pretty reasonable. They just want to be left alone, a request I’m usually happy to oblige. They complain when it’s time to fix something because that’s one of the main perks of being a tenant. You don’t have to fix shit.
Some tenants just aren’t happy with this arrangement, and lust to buy themselves a house. I get that. I’m a homeowner (inserts plug for the 19th time), and I think it’s great. It wasn’t great when I had to fix my own damn leaky tap, but that was an easy fix. I like being able to customize what I want and knowing I’m not going to have to move for a long-ass time. Getting the mortgage paid off will be pretty sweet too.
Certain prospective homeowners just can’t get themselves a place, no matter how hard they try. Some just can’t afford to save the down payment. Others scrape together the needed 5% down, but have garbage credit. Some have even done things right, only to be screwed by the new mortgage rules.
If these folks can’t qualify the old-fashioned way, they’ll start looking for alternatives, like the popular concept of rent-to-own. Here’s why such a deal is a terrible idea for a seller.
Huge buyer advantages
From a buyer’s perspective, a rent-to-own is the world’s greatest thing.
A regular real estate transaction lets you take control of a property with as little as 5% down. That kind of leverage is only possible when buying houses. You can’t get that far in debt when buying anything else, luckily.
A rent-to-own deal is even better. You take possession of a house with zero down.
As we all know, something is bound to go wrong with the house at some point. The furnace will need to be replaced. The washer will spring a leak. The roof will cave in when fatass Santa Claus visits. It’s an inevitable part of home ownership.
Most homeowners have a little bit of cash tucked away for such an oc–sorry, couldn’t even finish that with a straight face. Most homeowners find a way to muddle through such commitments, usually be charging up their credit cards. A select few have emergency funds.
The average rent-to-own person doesn’t have the ability to make it through an event costing thousands of dollars. They’ve barely got the ability to make it through an event costing tens of dollars. So they throw up their hands in frustration and move out. These people are good at making bad choices. It’s what they do.
The owner now has to find a new tenant and fix the crap the old tenant left behind. What a great deal.
Increased rent…at a cost
To compensate for this risk, landlords will either insist on some sort of down payment/security deposit, or extra rent. Such extra rent tends to go towards the equity the buyer is earning in the property.
This works, at least in theory. In reality, charging extra for rent just sets people up for failure and makes them bitter.
Imagine paying $200 extra each month for a rent-to-own contract. Yeah, you’re building equity, but you’re also barely scraping by each month. Not that you would have been smart with that money–after all, you’re a rent-to-own person–but still.
The next thing you know, you’re looking at some $1,000 repair bill you can’t afford. So you go to the landlord/owner, and ask for a bailout. You cash out your equity, and you’re back to stage one.
How is this a good deal for the landlord? The whole point of such an exercise is the tenant is supposed to build equity, not piss it away.
Even if this doesn’t happen, charging someone extra rent means they’re less likely to pay on time. It’s true for you, me, or Johnny McDirtbag.
Just don’t do it
Rent-to-own contracts are a terrific deal for a buyer. They get to control real estate with a very minimal investment, even if the interest rate is higher.
They’re a terrible deal for a landlord. You retain all of the liability with very little benefit. And the relationship doesn’t tend to end well. Owner financing is a far better deal. At least when you do that, you transfer the liability to the buyer.