Why rent-to-own when you can rent?
Posted 3/27/2008 by Joe ZekasEvery so often I get a protective urge toward prospective home buyers. I almost always feel that urge when I see a rent-to-own offering.
Rent-to-own programs are usually pitched as a boon to the cash-starved home buyer.
My take: you'll generally find this kind of offering on overpriced properties in second- and third-tier neighborhoods. If you're a cash-starved would-be buyer, avoid rent-to-own programs unless you're savvy enough to understand all the details - all the details. Only a fool would enter into one without a good home inspector, a good appraiser, and a very experienced lawyer. And how can you afford that team if you're cash-starved?
The purported key to a rent-to-own program is that a portion of the rent you pay is credited toward your down payment. Why not simply rent or share a lower-priced apartment for a while and save the difference toward your down payment?
Comments
3/27/08
Piotr said:
A better question is:
why buy market-driven overpriced condos when you can rent for a significantly less monthly rate, and pocket the difference?
Real estate prices will continue to fall, or rather, prices will come into agreement with income levels. Rent-to-own is stupid, but so is buying beyond your means.
Joe Zekas said:
Piotr,
The prices need to "come into agreement with income levels" simply doesn't wash.
Unless you're coming at this from a different standpoint: the argument is typically phrased in terms of median household income.
In Chicago, where only about 40% of the population buys a home, the relevant income number is the income of that 40%, not the income of the other 60% who rent.
That misleading argument also ignores the dynamism of the market and the wide variations among income ahdn price levels in different neighborhoods.
In any event, enlighten us: what is the median income of prospective home buyers (many of whom are also home owners with substantial equity), and how far out of line is it with the median price of housing? I'm betting that you don't have a coherent response to this. Prove me wrong.
3/28/08
Local Realtor said:
How about some comments regarding a variation of rent-to-own - "Contract Sale" or "Agreement for Deed?" Some cash-strapped buyers think this is a good way to get into a property without going through the hassle (and potential non-success) of applying for an actual mortgage. But what they usually don't understand, and I have to explain, is that although they are living in the home and making payments, the seller still "owns" the place until the final payment is made. So in the end it's not much different from renting. Or am I missing something here?
Joe Zekas said:
Local Realtor,
Depending on the exact structure, the tax consequences can be very different. You don't get to deduct your rent.
Piotr said:
Joe Zekas,
What is the typical multiple of real estate value versus income of purchasers nationwide? Historically, 3x I believe. But that has changed significantly recently to around 5x.
You know the specifics of Chicago better than anyone else. What is the multiple of real estate value compared to income of purchasers in Chicago? From just the listings on your blog, the typical value I see is between $250k and $600k, and if the values are compared well against the historic multiple, average income of home owners would be around $150k per year?
Joe Zekas said:
Piotr,
I don't have a current number - and it's in flux due to the credit brouhaha.
If you look at census figures, there are very substantial numbers of households in the $150k and up income range in Chicago.
Sheridan B. said:
Isn't the median income closer to 40k/household for the city?
George Costanza said:
Sheridan,
I thought I saw in a CNN/Money article that the medion household income for the Chicago metro area was around $46000 but I could be wrong about that. Also, I don't recall what they considered the Chicago metro area to be. I'll see if I can find it. I think it was from last year sometime.
Sheridan B. said:
George, that seems reasonable; the figure I came up with was a city only number.
George Costanza said:
Here it is for what it's worth…
http://tinyurl.com/ytr5s5
This is for the city only not metro. It has median family income at $46748