Renting to Own…to Good to be True?

Owning a home – it’s one of those things that we’re told we should do from early on in life. Home ownership is considered a status symbol that separates the middle class from the poor class. Wikipedia even states that a core pillar of the the American dream is owning property.

 

This is why even when living in a location where it’s better to rent than buy, many people are insistent on owning a home. Since the housing market bottomed out and loans are difficult to obtain, finding an alternative way to sell or own a home has become a necessity. One option is a “lease to own” contract between a buyer and homeowner. The future buyer will rent the property for a period of time, then have the option to purchase the home at the end the lease.

 

How it works:

 

Before moving into a lease to own property, both parties will agree on a sale price and lock it in. The buyer will usually be asked to put down a 3% to 5% non-refundable payment called an option fee.  In most cases the potential buyer pays an inflated monthly rent, with the extra funds going towards the down payment. This gives the potential buyer time to build up the down payment over time while raising their credit score through other means. The rent to own arrangement helps sellers pay the mortgage in a house they may not be able to sell, and lock in their asking price. This seems like a dream come true for homeowners and buyers who may be in a bind. Like everything in life, if it looks to good to be true…it just may be. Let’s take a look at some of the pros and cons of the rent to own home agreements.

 

Pros:

 

If done correctly the rent to own home can be a perfect fit. It helps both the owners and the sellers get the end result they are looking for.

 

No down payment: Renting to own lets people build up a down payment over time instead of having to come up with the large sum at once that most banks require at signing.

 

Try before you buy: For the buyers, renting gives the option of living in the house and exploring the neighborhood before locking in a 30 year loan. If they decide they hate the house or location, they can back out after the lease is up.

 

Broader Market: Homeowners now have a bigger eligibility pool when it comes to buyers. People that previously couldn’t purchase a home can now considered for future ownership.

 

Locked in price: This can be a plus for either the buyer or the seller. If the value of the home goes up, then the buyer already has a locked in price. If the houses loses value, then the owner won’t have to take the equity hit at the end of the rental lease.

 

Cons:

 

There can be many setbacks when it comes to a lease to own contract for both the buyer and seller.

 

One mistake could mean losing it all: One late payment to the owner could mean that the contract has been violated and have stiff consequences.

 

Scams: If the owner of the house ends up losing the house, the buyer is out of a home and the extra money they invested. Homeowners have been known to do lease-option deals fully knowing that the home will be foreclosed on, leaving the buyer homeless and out of any money they invested.

 

Walking away can hurt: Either the buyer or seller walking away at the end of the lease can be a blow to the wallet. Buyers lose the option fee they placed down along with the rent credit they’ve been building up, while sellers can lose equity if the value of the home has dropped since the potential buyer moved in.

 

It costs more: Just like traditional rent to own situations, the buyer will pay more in interest fees over time.

 

Your credit may not cut it: Even after the option fee and inflated rent the buyer pays, renting to own doesn’t actually help their credit score by itself. Buyers may still not be able to get the loan at the end of the lease due to credit issues, and lose their entire investment.

 

Is it worth it?

 

In my opinion, renting to own a home is not worth it for the average person. In many cases, the buyer is set up to fail, and the seller usually has the advantage. There are just too many variables that can go wrong in a lease to own situation. The thought of potentially losing out of tens of thousands of dollars because the rent was late once is insane. Owners can lose out too, if the future buyer backs out or disappears the homeowner is stuck with a house that may have less market value. Until that title has been handed over, the person who is looking to buy is still in a renter/landlord relationship. If that relationship goes south, then the rent to buy option may go along with that. As much as lease-ownership situation is perfect in theory for the right folks, people can do bad things and take advantage of the situation. The potential consequences are high for both sides.

In most cases people will be able to find the right mortgage broker and make it work.  If you can’t make the numbers work my advice is to fix your credit, save for a down payment and then go find that dream home. If you can’t afford a home loan don’t burden yourself with higher rent in a desperate attempt to be a homeowner.

 

If the decision to go through with the rent to own home happens, then go through the motions of actually buying the home. Get home inspections and do other homework on the property. Make sure to find a reputable lawyer write up and look over all contracts before moving in. Rent to own home ownership can be risky, but if done correctly and with the right people, then both sides can walk away happy.

 

Source: wordpress.com

Miami Real Estate Housing Market for 2007: What Trading in Housing Futures Foretell

Prices of homes will even be lower a year from now in the Miami real estate housing market--at least, according to what investors speculating on housing real estates suppose. Chicago Mercantile Exchange trading in housing futures point to home price drops by August of next year amounting to 6.8 percent for the Miami real estate housing market; the predicted price decline in Miami is well above the average drop in 10 leading real estate markets of the United States.

The speculations by traders in the Chicago Mercantile Exchange (CME) are fairly consistent with the results from a survey conducted by Moody's Economy.com, which examines the 100 largest real estate markets in the U.S. Economy.com predicts that real estate housing markets will first get worse before they get better again, in the perspective of property sellers of course. The survey considered mortgage rates, the local job market and other factors to come up with the figures. According to this survey, the Miami real estate housing market is yet to experience its deepest home price decline of 5.5 percent by the second quarter of 2008. Nationwide, the study forecasts a 3.6 percent decline in the sales price of existing homes.

The S&P CME Housing Futures and Options, which took off during the Spring of this year, enabled investors to circumvent against a decline in the value of housing properties in the future or to bet that those values will rise. The investments are connected with the Case-Shiller Home Price Indices. Robert Shiller, author of "Irrational Exuberance," claims that the results of the CME trading in housing futures offer a substantial predictive value. In Shiller's words, "[The trading results] gives us a finger on the pulse of the [real estate] markets." As a matter of fact, prior to the launch of this trading, real estate speculators had seen a narrow opportunity to invest in housing markets short of going out and buying actual properties.

Richard DeKaser, who is National City Corporation's chief economist, is pessimistic about the results of the trading though. According to him, because of the novelty of investment vehicles that CME introduced just this year, the trading may not offer the same level of predictive power as other derivatives products. DeKaser points out that the problem lies in the fact that real estate markets cannot be considered to be very deep markets, hence traded remarkably thinly. He is therefore considerably reluctant to attach too much value on the figures the CME is posting right now.

On the other hand, those who are doing the trading themselves seem to be betting accurately. According to Fritz Siebel, Tradition Financial Services' director of property derivatives, the CME trading results quite fairly came close to where the actual Case-Shiller index wound up in validation tests. Therefore, if the home price drops that the trading predicts are fairly accurate, home sellers in Miami should better be wary.

Nevertheless, Shiller advises that the figures may exaggerate the degree of the decline because of a risk premium taken into account. This implies that more traders prefer to protect themselves against loss (risk aversion), rather than investing in a growing market. In the words of Shiller, "the predicted decline might be a bit bigger than the actual one." The more realistic scenario would actually have the risk premium diminishing as the market for these derivatives swell and as investors who are willing to take the opposite position enter into it.

Nevertheless, even if all minor details are taken into account, the CME trading still points toward a fairly considerable turnaround of housing prices in Miami. As mentioned, the results are consistent with a host of other indicators, such as Moody's Economy.com survey, that apparently agree that housing prices in Miami real estates will not only equilibrate but actually plummet even more.

Article Source: Ezine Articles