Joe Baker's Real Estate Blog

I've had many calls lately about finding a buyer a home on either a contract for deed or a rent to own.  These calls are coming from people that just can't get a mortgage right now, or don't have the required funds for down payment per their credit.  I have been having the conversation about the positives and or negatives for each one so I figured I would write about it.

So let's first talk about a Rent To Own Situation.  Here are a couple of Positives a Rent To Own Home:

• You can work toward home ownership with this type of contract.
• You will typically get a credit each month for on time payments that you can use towards the purchase price.
• You will typically have less money out of pocket to sign the contract.
• If you make UNDER a certain amount for your income, you will get a renter's credit to be used on your taxes.
• You have a set purchase price that you know about from day 1.

Here are a couple of negatives for a Rent To Own Home:

• You don't actually own the home.  The rent to own contract is a glorified rental contract.
• If you default on any portion of the contract, you may lose the chance to buy the home for the agreed upon price.
• When you apply for a new mortgage, the lender will NOT recognize the Rent To Own Contract.
• You have a set purchase price that you know from day 1.

Now wait, I listed one items as both a positive and a negative above (see the comment in bold).  Well, it all depends on what the price is from day 1.  If the market appreciates more than anticipated, you might end up getting a better deal on the home.  However, if the market goes down, you may end up having to buy the home for an inflated price.  Not many normal buyers are willing to do this so you may just end up walking away with nothing to show for your efforts.

Here are some positives for Buying a home on a Contract for Deed:

• You actually own the home from Day 1.
• You get to write off your mortgage interest and closing costs, just as you would if you obtained a standard mortgage.
• You know what the purchase price is from day 1.
• When you come to your balloon (if you have a balloon payment set) the mortgage company will actually recognize the contract and acknowledge your amortization schedule.
• Depending how far out your balloon payment is (again, if you have one), the mortgage company will consider it a refinance.  This makes it much easier to obtain the mortgage.

Here are some negatives for Buying a home on a Contract for Deed:

• If you default on any portion of the contract, the Contract for Deed could be canceled in as little as 30 days.  You could potentially lose your down payment.
• The down payment that may be required could be a lot higher.

So, as you can see, there are positives and negatives to each method.  In my opinion, if you can get into a contract for deed as opposed to a rent to own (or even a rental) you will be much better in the end.  To answer a question that I'm sure is lingering - In my experience, I have worked with Buyers that had to put as little as 1.5% down to get into the contract.  On the flip side, there are some sellers who will not even consider selling on a contract for deed unless there is 20% down.  It all depends on how motivated the seller is, and how credit worthy they think you are!  Please contact me if you have any questions that I did not answer.