Rent with Option to Buy

[callie212]

What is the name of your state? New York

I am in a situation where I must move by May 1st from my apartment and I am looking for a house. I live with my boyfriend of 10 years and we have a 4 year old son. We both are graduating college this semester (in May). My boyfriend will be taking his boards for his RN licensee and I will have my Bachelor's degree in Communication. I know that seems irrelevant, but I will get to the point of that.

We want to buy a house, but don't have a lot of money now since we have been in school for years. We will be earning a decent income very shortly. With that said, we can't buy right now. We were planning to move within a year after graduating. Our current landlord has given us notice to move out my May 1st because she wants to move some of her family in our place--fair enough. But now we probably have to move twice, now, then again in a few years.

We found a place that we really love...a nice 3 bedroom house with a lot of land. Its beautiful. It's in the country and very private. The perfect kind of place to have our kids grow up. The owner wants to do a rent to own. He said that he will rent it out if he doesn't get anyone interested in rent to own, but we would not be the first choice since we have cats. So, basically, if we don't want to do the rent to own, we won't get to rent it at all. We DO want to buy the place...but we can not possibly be expected to make a decision in less than 2 weeks.

I am wondering what kind of advise I can get about rent to own. We have contacted an attorney, but we have to wait to see him. I am not sure exactly how renting to own works yet it seems to be very different depending on what terms you agree on. His asking price for the house is $165,000. His request is to pay an option fee, which is 1% of the agreed price for each year that we want the option. Three years is probably what we are looking at to give us enough time to save more money, so it will be somewhere around $5,000. Plus, he wants $2,000 security deposit for the rental (the 3-year time frame), which is double because of cats. He just put in new carpet, so I understand that he wants double security for pets. The monthly rent is $975.

I don't want to be pressured into buying a home, so I am just so unsure of what to do and what to request. We have never purchased a home before. I filed bankrupt 4 years ago and because i have been in school, i haven't had the income to do much towards building my credit other than working with my debit card, checking account and an auto loan. (which has never been late) In the future with three years of working full time, I will be able to build my credit up. Last time I checked, my credit score was 571.

If we give him $8,000.00 (option fee, security and first months rent), it will be everything that we have saved right now. We anticipate that we will gross between $6,000 and $7,000 together monthly by July when school is over. I have a job now that I will begin full time in May at $3,000 a month gross and he will be an RN, so we don't see problems finding work.

The ONLY reasons that we wouldn't be able to follow through with buying the home in 3 years will be: 1. either because we hate living there or 2. if the property value goes down from what we agree on now, and I will need a larger down payment than what I had been expecting when I go to mortgage it. I mean, in 3 years, if the property is worth only $150,000 and I agree to pay $160,000 now, I need to come up with an additional $10,000 to secure the mortgage.

Since I know it takes more than a week to decide on a house and to get an appraisal and inspection, does it sound fair to ask to move in on a 12-month rental agreement with a clause stating that I need to decide by 6-months if I want to buy the home, and do all the paperwork then, pay the option fee, etc. I would agree that if we could not commit at that time, he can start his process of putting the house on the market, and we have 6 months left to move out--6 months left for him to find a new buyer/rent-to-own tenant. He does not have anyone else interested in rent to own, and he said he wants to have a decision on who moves in by Friday, so if he doesn't go with us, he's only going to rent it anyways.

Maybe I'm rambling, but any advise on how this process works and what we can do is greatly appreciated!

One specific question is----
How does the option fee usually work? Does he keep it, or is he holding it as security that I will follow through with obtaining the mortgage, which he will then return to me for my use as part of the down payment. I thought it typically goes towards the down payment, and is lost if you don't obtain the mortgage by the end of the option time stated in the contract. This seems to be one area that we are in disagreement on. He states that his lawyer told him that the option fee is his to keep for holding the house for 3 years at the agreed upon price of today's dollars. I understand that a contract can be written however both parties agree on as long as there isn't criminal activity involved, but what is the most usual way that an option fee is handled? If I pay him almost $5,000 now to have the option, with no retrieval of that money, I have to start saving all over again. This seems to be a huge risk to me.

[LindaP777]

Originally Posted by callie212

How does the option fee usually work?

It can be set up many different ways, depending on what you agree to and what is written in the contract.

Originally Posted by callie212

Does he keep it, or is he holding it as security that I will follow through with obtaining the mortgage, which he will then return to me for my use as part of the down payment. .

Again, depending on what's agreed to, but typically used as part of your down payment. If you do not buy the house, it's usually forfeited. In my lease with options, I contribute $100-$200 per month for every month the rent is paid on time towards the down payment. That way, my tenant has a chance to build their down payment while they are living there.

Do not agree to anything you are not comfortable with. If needed, hire an attorney to protect your interest. Clearly, the owner has hired an attorney to protect his interest, to the point where it may only benefit him, the seller and not you, the buyer. (So his lawyer did a good job for him.)

If you want, I'm happy to e-mail a copy of my lease with option. Just click "Private Messages" in the top right hand.

[callie212]

Thank you.

We are hiring an attorney. The seller did suggest that we get one to work everything out.

He offers in his agreement he gave us an option to pay an extra $250.00 monthly to add towards the mortgage, but he said it was optional so I'm not going to do it. Instead, I will put the extra $250 in a savings account instead so I'm not obligated every month.