Introduction

Hi, my name is Charlie Russ. I’m the Founder of the HomeBuyer Angels, “Helping you to invest in yourself.” TM We’re a real estate company dedicated to helping people realize the American Dream of homeownership. Thank you for taking the time to invest in your future by learning and studying these best practices. This information may be the most important information you will ever receive in your entire life. It could help you acquire $10’s of thousands of dollars in equity in your own home. It can help you and your family realize financial security…starting immediately. You can think of this is a list of Do’s and Don’ts to help you succeed in a rent to own agreement or to steer your away from a potentially bad and costly deal. This document is not intended to be a 100% complete and comprehensive discussion of everything there is to know about rent to own, or the home buying process. It does not offer any legal advice whatsoever. This information is written to help the prospective homeowner to understand more about the rent to own process. It raises a lot of questions which only you can answer. It is written to educate you so that you can make the right decisions for you and your family. I’m sure that you’ll find this information to be of great value.

Rent to Own is a service to YOU. You are spending your money. You should feel like the customer and YOUR needs should be met

Discussion: If you do not qualify for a loan today, or if the down payment requirement exceeds your resources, and you are committed to buying your own home, today, rent to own may be a good option. What exactly is rent to own? Rent to own enables someone, the “Buyer,” who otherwise could not secure a mortgage commitment, to eventually own their own home. They rent a property for a set period with a legal contract to purchase the property at the end of the set period of time. The person offering the home for sale is referred to as the “Seller.” Generally there is a down payment which is credited to the Buyer at the time of his purchase. Sometimes, a portion of the rent is credited toward the down payment. In most cases, failure to complete the contract results in forfeiture of all monies contributed. There are many loopholes and conditions in these contracts, so it is important to have those contracts reviewed by an attorney. See item 7 below for more explanation of the importance of an attorney.

Another misconception in the real estate world and the rent to own world is that there are great number of qualified rent to own “buyers,” and that the buyer should be considered lucky to get into a rent to own deal. The fact is that there are many more properties offered as rent to own than there are qualified buyers. So, my message to you is that you are in the driver’s seat when it comes to participating in a rent to own contract. Sales are soft across the real estate market. Qualified buyers are a rare commodity. You are spending your hard earned money to make monthly payments, to pay utilities, and to continue renting a property and paying someone else’s mortgage (until you succeed in acquiring the property on your own). The point I’m trying to make here is that you are the customer spending your money, no differently than if you were going into a retail store to buy a product. You should be “courted” for doing the deal. You should be treated as the customer. You should be treated with respect. Your Seller should be able to demonstrate the financial benefits of participating in the rent to own contract in black and white easy to understand figures. You are investing in the rent to own process. There should be a return on your investment. If the Seller cannot demonstrate these benefits to you, you may be better off continuing to save on your own and waiting to qualify for a mortgage.

Buying a Home is a lot of hard work. If you’re looking for a quick and easy fix, you’ll likely end up with the short end of the stick

Discussion: Probably the biggest misconception in the marketplace is that people can buy a home without any savings. The “no money down” advertisements are everywhere. They lure people into calling about a mortgage or looking at a property by implying that a person doesn’t need any savings to purchase a home. The truth is that while there are 100% financing options available, most legitimate mortgage programs require some savings to qualify and close on a mortgage. Do your homework regarding whether or not you qualify for a mortgage. Depending on one’s credit, a bank may require 2- 4 months of total fixed bills, including mortgage payment, real estate taxes, homeowner’s insurance, association dues, PLUS all fixed payments such as credit card payments, car loans etc… For example, if a mortgage were $1500 per month, real estate taxes were $300 per month, insurance costs were $50 per month, and all other debt payments totaled $500 per month, the buyer would have $2350 per month in fixed expenses. A bank might finance 100% of a purchase if the borrower had 2-4 months total fixed bills, or “reserves.” (Reserves equal the amount of fixed bills/per month already in a savings account, which would be available should the borrower lose his/her job) So in this case, the borrower would have to have between $4700 and $9400 in the bank, today, to qualify for 100% financing. Then there are closing costs, usually around $2000-$4000 depending on the price of the home. Sometimes closing costs can be paid by the seller, but it’s important to know that in advance of applying for a loan.

Do not permit mortgage lenders to pull your credit until you are ready to apply for a loan. The old adage, “Knowledge is Power” really applies to those looking for a mortgage. One of the biggest problems people have with their credit is having their credit pulled too many times when shopping for a loan. You should pull your credit yourself with one of several free credit services. When you call the lender, you can tell him your credit score and your income and outstanding debts. This information will be more than enough for a lender to quote you a rate. The rate quote is not a guarantee that you’ll get a loan, but it will enable you to shop for the best deal without the lender pulling your credit. Too many credit pulls in a short time may cause the credit score to go down.

It’s hard work saving money. But if you have no savings, most likely, you cannot qualify for a loan. So start saving today! Even $50 per week will add up. Finally, don’t forget your community bank…start your mortgage search there. Most community banks offer far better rates than mortgage brokers. Their fees are substantially less and they have a better reputation for being honest and realistic about whether or not they’ll give you the loan. And they will be happy to review the credit report you get yourself off the internet with you in person. Ultimately, every lender will have to pull you credit for their internal approval process. But, if you have all the data up front, you will avoid the trap of too many credit pulls destroying your credit and your opportunity to buy your own home.

Be realistic about what you can afford

Discussion: In my opinion, most banks will lend you more than you can afford and most rent to own sellers will put you in contracts which are beyond your means. How can you know in advance what you can afford, before you start the process? It’s really quite simple. Be conservative. Remember, I just told you that most parties will lend you more than you can afford. So what can you afford? Banks look at your income in two buckets: Housing, and all other debt. Housing costs include mortgage expenses, real estate expenses and insurance or association dues expenses. To be conservative, I recommend that a person spend no more than 25% of gross income, on housing expenses, and have a total debt picture of not more than 35% of gross housing expenses. The figures are before taxes. Let’s look at an example. If a family makes $6000 per month in gross income, they should be able to comfortably manage $1500 in total housing costs, with about $600 per month in other fixed bills including credit cards and car payments. Now the trick is that banks and lenders mix before tax dollars with after tax dollars. If you make $6000 per month, you are likely only taking home about $4500 to $4700 per month. So if you have $2100 in housing expenses and fixed bills, that leaves you with about $2300 for all other bills. Utilities may be up to $500 per month for gas and electric and telephone. Automobile insurance doesn’t show up on the credit report as a fixed expense but is usually at least $50 per month. Clothing, food, school expenses, gas and all other expenses must now be funded from the remaining $1500 to $1800 that’s left. Maintenance on the home is expensive. Lawn maintenance, painting, fixes, new appliances and other household expenses add up quickly. In my experience, a person making $6000 per month thinks they can realistically afford a $200,000 home, because that’s what the mortgage broker tells him. But with these expenses, a home of $150,000 would be more realistic. Sure, someone will get you a loan for $200,000, but then you’ll really be struggling to pay all your bills and will put yourself in a possible foreclosure situation. Because ultimately, people pay for food and gas before they pay their mortgage. Finally, there are many “stated” income mortgages. These mortgage products do not require verification of income to get the loan. If you’re reading this document, you most likely are challenged to get a loan, or a loan that you can afford. Ask yourself this question. If I cannot prove to the bank that I have the income to support a mortgage, can I realistically generate the income to support that mortgage payment? If you are self employed and truly have a reliable income stream, the answer may be “yes.” If you get paid a salary or wages with a traditional W2 form, then the answer is probably “no.”

Ensure that you have a very realistic plan to ensure that you will qualify for a mortgage in the next 12-24 months

The plan for credit repair or saving more money for a down payment should be in place before you sign the final contracts.


Discussion: Again, tough love. Let’s be honest with ourselves. There is something preventing you from getting a mortgage today. It may be mistakes on the credit report, it may be an ex-spouse or past relationship, it may be too much debt or too many collections, but it’s something. Something has to change in order for you to get a mortgage. Something even more has to change in order for you to get a very low cost mortgage. If collections are keeping your scores low, there are two ways to address them: Paying them off or having them removed from your credit. If they are legitimate collections, you must pay them off to get them off your credit. Some collection agencies will accept partial payment. If you can negotiate partial payments on your own, it may be to your advantage to accept their offer and pay it off. If your issue is not enough down payment, start saving. It’s possible that you may never be able to pay off the debt you’ve accumulated, in which case a discussion with a bankruptcy attorney may prove helpful. Only a bankruptcy attorney can give you the proper legal advice regarding filing bankruptcy. Finally, these questions are raised to get you to think about your specific situation. Our advice is that you should have a plan of action for fixing your credit scores including remediation of your debt. We are not licensed credit counselors, so we do not offer specific advice. We do recognize the importance or ensuring that the individual entering a rent to own contract should have a plan with realistic goals and objectives.

But in the end, you have a credit situation which has been established over the years. If you wish to own a home in the next two years, you must have a plan and the financial resources to execute that plan in order to succeed with securing a mortgage. Again, it’s not easy. You must make sacrifices and be honest with yourself regarding your personal and financial capacity to mitigate the financial issues which have prevented you from obtaining a mortgage. I can tell you that the rewards are endless and that sacrifice today will most likely pay big dividends through potential equity appreciation in your own property.

Avoid Rent to Own deals involving properties under foreclosure

Discussion: The majority of rent to own deals involve a property under foreclosure or recently under foreclosure. In most real estate deals there are two parties, the Buyer and the Seller. As foreclosures are hitting an all time high, there is now a third party involved in the process, the “real estate investor” selling you a rent to own contract on another party’s property. In the past couple of years, foreclosures have hit an all time high. It is projected that these trends will continue. This has opened up the door to a large number of “real estate investors” who portend to “help” people out of foreclosure by putting together a rent to own contract. How does this work? Person A is losing their home to foreclosure. This data is available through public records. Person B, “the real estate investor,” contacts Person A and offers to “buy” their home through a rent to own contract. The real estate investor promises to buy Person A’s home for a set price in the future. Usually, the real estate investor requires that Person A sign over the legal title to him through a “quit claim deed” or a “deed in trust.” The real estate investor promises to locate a buyer who will in turn rent to own the property. The real estate investor is a middle man who earns large fees, sometimes without any investment in the property. Person A almost always ends up with the mortgages remaining in their name. So they have mortgages and legal responsibility for a debt on a property they’ve legally deeded to a third party. What does this mean to you if you are the Buyer on a rent to own that’s in foreclosure? You are paying rent to a third party who has legal title to the property, but who little or no investment in the property. You may be renting a property under foreclosure. You have no control over whether or not back taxes or back mortgage payments are truly being made. You may be evicted from the property if the bank forecloses on the property. This scenario presents great risk to you, the Buyer.

Greater risk involves entering into a purchase contract and a lease when you don’t have the capacity to succeed in the final transaction, buying the home with your own mortgage. Many books have been written, and seminars given, showing real estate investors how to legally take your money from you. You give them a down payment and sign a contract to purchase the property. But you already have an issue you’re your credit. How will that be mitigated? Can it be mitigated within the time frame of the contract? Some foreclosure/rent to own seminar programs boast that up to 40% of the Buyers default. They cheer when the Buyer loses his down payment as a result of failing to satisfactorily complete the contract. Then the real estate investor just goes on to the next naive Buyer and the cycle continues. The reality is that it can be very difficult for a Buyer, who already doesn’t qualify for a mortgage to succeed in the typical rent to own contract. That’s why it’s essential that you have a realistic and achievable goal of fixing your credit at the time you enter into a rent to own contract. Otherwise, you will not be able to fulfill your obligation to purchase the property and you will likely forfeit any investment you’ve made in the property.

If this section seemed complicated, that’s because it is complicated! Buying a home from an individual homeowner or a builder is complicated enough. Bringing in a 3rd party just makes it more complicated. That’s why the knowledge of point six below is so helpful.

Go directly to the current owners for rent to own. Hot tip!!! New Construction may be available as Rent to Own

Discussion: The biggest problem with rent to own is that most often, a real estate investor has a small selection of properties available for rent to own. These properties are almost exclusively acquired by taking someone out of foreclosure. At this time, sellers are becoming more and more anxious to sell their properties. Most people have other places to move and cannot afford two mortgages. Again, while it is not easy, you can take control of your own destiny and offer a seller to do a rent to own on their property, thus avoiding the middle man real estate investor. How would that work? Let’s say you cannot secure your own mortgage. You could approach a seller directly and offer to rent the property with an option to buy. Many developers have over extended themselves. They may be happy to relieve themselves of a monthly payment in exchange for a “contract” to sell that same property at a future date. This is not easy to find, but it’s safer and more satisfying than doing a rent to own involving a foreclosure.

Negotiate with the seller

Discussion: As discussed earlier, under a traditional real estate transaction there is a Buyer and a Seller. The Seller offers his property at a certain price and the Buyer makes a written offer to purchase the property. Then the negotiations begin. With a rent to own, that process is reversed. In most cases, the Seller produces a contract and offers it to you, the Buyer. This creates the perception that the Buyer must take it, or leave it. The number one most important thing you should know about rent to own is that YOU are the customer and that YOUR needs should be met. This certainly applies to the negotiation process. If a seller makes an offer, make a counter offer. Do not accept their first offer for a rent to own deal. My late father taught me one of the most important lessons I’ve ever learned with regards to negotiation. His credo was: “You’ve never asked for too much until you’ve been given a hard no.” I can’t tell you how many times I’ve implemented this strategy in negotiating a deal for myself. Some people are shy or afraid to negotiate. Well, this may be the case, but again, a theme of this paper is that this process is hard. It takes a lot of sacrifice. So put yourself out there. Do something that’s uncomfortable. Negotiate the deal. There’s almost always room for negotiation from the first offer. Remember, you are the sought after commodity. If you qualify for the deal, a seller will gladly reduce the rent or the down payment and should always provide for attorney review.

Review all documents with an attorney before signing any contract

Discussion: Everybody should have an attorney review documents before entering into any legal contract. A typical fee to review a real estate contract is $500. Any real estate agent, mortgage lender or homebuilder will have contact information for reliable real estate attorneys. If you cannot afford this fee, then I would suggest that you cannot afford to buy a home at this time. You plan on spending $100,000 to $300,000 on a home. The mortgage payments and all costs will be thousands of dollars per month. If you do not have the $500 to pay an attorney then I strongly suggest that you save your money until you do have the $500. Investing in a real estate attorney is extremely important to protect you from signing a document that may ultimately cause you great financial hardship. In many states, it’s customary to sign a real estate contract, and, as a part of the contract, provide up to 5-10 business days for “attorney review.” It is acceptable to sign a contract provided that the attorney review period is clearly spelled out. A legitimate contract will provide for attorney review, inspection of the property and other options for the Buyer to get out of the contract within attorney review for any reason, with a full refund of any deposits or escrow payments. If the contract the Seller presents does not have an attorney review clause, add it in or walk away from the deal. Every legitimate Seller has attorney review included in a contract. Finally, the federal government and various states have recently enacted legislation to protect both the homeowner and the prospective home buyer. Your attorney should be well familiar with the laws in your local area to ensure that the rent to own contact meets legal requirements and doesn’t put you in difficult situation.

Work only with legitimate business and demand references

Discussion: One of the most important concepts you should take away from this document is that you are empowered to move your financial future in a positive direction. The rent to own industry preys on desperate and gullible people. It's especially important to ensure that you are dealing with a legitimate business when you enter into a rent to own contract. Do your research with the Better Business Bureau. Ask them for references. Any legitimate business will offer references. If they do not have references, I urge you not to do business with them. Certainly a builder has other people living in other homes or condo units. Ask for their names or simply knock on the door. It’s especially important to speak with owners in a new development as often times they do not meet their obligations. It’s better to know sooner than later! If you are buying a rent to own property from someone who does rent to own contracts as his primary business ask them how many people they have helped? Then get their names and call them. Who are their bankers? How long have they been in business; is their company in good standing with state and local governments? Ask them if they are incorporated and if so, you may check whether or not their corporation is in good standing with the secretary of state.

Follow your heart and your instincts

Discussion: It’s very important that both you and any partner you are involved with feel comfortable with the seller and the entire process. If the seller goes back on his word, changes the agreement midstream, cannot produce a reasonable number of referrals, then you should consider getting out while you still can. My experience tells me that people who “do what they say, and say what they do” consistently from the first time you speak with them throughout your entire relationship, have the character you’ll be looking for in a rent to own partner. You are putting a great deal of trust into the hands of this individual. If you have any doubts about their integrity, politely bow out. This is not to say that you may have doubts or be scared about proceeding with a rent to own contract or any home purchase. As we discussed earlier, it is a big commitment and you should have some reservations about the risk. You should, however, be well positioned to mitigate or eliminate the risks with careful planning.

Conclusion

Congratulations! You’ve just invested in your own future. Buying a home is usually the biggest investment anybody ever makes in their entire life. So certainly it only makes sense that you should invest in learning about the process and how to protect yourself. There are many Rent to Own programs available. Most of those programs focus on foreclosed or soon to be foreclosed upon properties. As we’ve discussed, they are not all reliable, safe or honest. Your job is to work hard to learn as much about them as possible so that you can make the right financial and personal decision for you and your family. Your real estate professional or banking contact should have the contacts and resources to help you learn if Rent to Own is right for you and where to turn to for experiences and trustworthy support. The HomeBuyer Angels wishes you the best of luck and success!!!