No More Rent to Own
No More “Rent-to-Own” or “Lease Purchases”
Many renters who don’t have the money for a down payment, or have credit issues, enter into what is often a one-sided “rent-to-own” or “lease purchase” arrangement. These leases offer the potential buyer an option to purchase the home at a fixed value if they can secure a mortgage.
Only a tiny percentage of these possible “buyers” ever qualify for a mortgage.
When they fail to complete the option, (usually after two years of mortgage applications and rejection), they lose their “option” fees, plus any extra payments above the monthly rent which were to be credited toward a down payment.
While they are still considered renters, these arrangements often require them to pay for some repairs and don’t usually include home inspections or system warranties.
Enroll in Our Comprehansive E-Learning Course: Why QCD is Better then Rent-to-Own
“Rent-to-Own” Upgraded to a QCD™
Buyers and sellers should work together to develop a QCD™ to make the buyer an immediate equitable interest owner. They would then complete the legal title transfer with a mortgage refinance after at least one year of contract payments.
Step 1
Step 2
Option price/value of the home. A review by the parties of the market comparable home values nearby, plus possible use of the monthly rental values (the “income approach” to valuation) and other elements should be evaluated by the parties to reconfirm or adjust the former option home price. Prevailing interest rates should also be examined in the income valuation analysis. The goal is for the seller and buyer to agree on a mutually satisfactory amount for the home value.
Step 3
Other elements to consider:
- Accounting for monthly payments and amortization of principal by the seller, and preparation of annual statements of interest paid by the buyer for tax purposes.
- Escrow and payment of property taxes and homeowner’s insurance by the buyer should be addressed.
- Seller may consider providing a home warranty for systems and appliances for the estimated 1 to 2 years of contract payments before refinance. Other repairs become the responsibility of the buyer.
- Seller income tax implications, including depreciation recapture in the tax year at time of the
execution of the QCD™, if applicable. - Possible Increase in property taxes as a result of the sale and recordation of the QCD™ for the home. This would be the buyer’s responsibility in addition to current tax amounts.
Step 4
Once the new contract amounts, rates, and terms are agreed to by the parties, the contract is signed and replaces the “rent-to-own” agreement.
The new homeowner/buyers will then work with the sellers to obtain a refinance mortgage (as included in the policies of FNMA, FHA and Freddie Mac) to refinance the contracts after at least one year of timely payments.
HOMES plans to educate and affiliate with these mortgage providers during the contract term.
The QCD™ program’s ADVANTAGES over ‘renting-to-own’ are many:
- IMMEDIATE rights of home ownership through an equitable property interest, as well as possible income tax benefits.
- Use of a QCD™ can contain recommended protections, including home inspections and warranties provided by the seller, title insurance review, and other components.
- If a refinance mortgage is not available to the buyer, they can continue as the equitable owner until a future refinance or completing the contract term.
- A simplified process to generate a refinance mortgage to complete the deed transfer. A suitable number of on-time payments, often referred to as “seasoning,” help demonstrate the buyer’s ability to pay.
