Home buying thread

Anyone have experience with a rent-to-own situation?

Here is the story, which I"ll try to not make too long... My wife will be graduating from graduate school at the end of May and already has a job lined up (Special Education Teacher). She"s worked maybe 20 hours a week the past year and a half so we"ve really been living on around 1.25 incomes and don"t have that much saved, at least nothing near 20% down.

A friend of ours just informed us of a house that a co-worker is trying to sell... his father died three years ago and the mom lived in the home by herself for a year and a half but has since moved into assisted living for almost 2 years now. The son is fine with renting and verbally gave us a rent price that is lower than what we currently pay for our 1 bedroom apartment. Apparently though, the mom does not want to rent the house and just wants to sell it and get rid of it.

So I"m looking at approaching it a couple ways... either completely low ball them to a price that I am comfortable with and hope the person is that desperate to get rid of it that she takes it, or offer a rent-to-own scenario. Home is for sale by owner and on the market for approaching 2 years.

Landlords LOVE people in their homes on rent-to-own contracts. They never have to fix anything, and the people never end up owning the house.

Yeah, I don"t know how its different to Australia, but rent to own is usually done here for people that cant get credit themselves, i.e. cant get a deposit or qualify for a loan, so the owner can basically do whatever they want to these folks. It"s going to work out very nicely for the owner as they can charge higher than normal interest or rent.

On the other hand, a lot of people seem to do it as they can own a place without needing bank credit, and not all owners are in it to exploit the renters. I"d just make sure whatever contract you sign is checked over very carefully by people that know what they are doing.

Yeah, we wouldn"t be doing it for those reasons. My credit score was 806 when we met with a mortgage broker last month so we can get a mortgage... the issue is the down payment and how uncomfortable I am putting so little down while we don"t have a lot of cash.

Maybe that means now isn"t the time for us to buy, but we"re still trying to figure that out. For the right price, a legit, non-exploitative rent to own option seems like all we can do, otherwise we will pass and look again when we can afford to own in the more traditional sense.

Wife and I have been house-hunting the last 4-5 weeks. Finally put an offer in on a property on Friday, found out today someone else got it. Even though we know lots of people that have bought a home in recent years, and they all pretty much say it took a few offers before they got their home, we still spent the weekend talking about "we can rip the carpets up in these rooms and put wood down" or "we can put your vegetable garden in that corner of the land" or "the kitchen would be perfect with new cabinets installed" etc etc.

I really envy the people that can (and are) paying cash for their homes, instead of the 20-25% we are looking to put down.

A huge turn off to rent-to-own or lease-option, should be the fact that the real owner can lose the house to foreclosure or do a short sale when you are 2-3 years in and there is jack you can do about it, you were just paying higher than average rent for that whole time and end up with nothing to show for it.

Lots of folks have houses sitting, could charge higher rent to some one for a lease-option, then stop making your mortgage payment. Takes about 2-3 years to actually foreclose. Profit.

So, I"ve been in and out of this thread for awhile as I"ve saved money and contemplated what to do. Just wanted some longer term advice.

Basically I"ve put almost all my money away in investments that have done quite well. I"ve got about 70k put aside now and am putting away about 4k a month at this point.

Two things have happened. One, I met the girl I think might be "the one". Two, my parents are getting divorced.

Without going too much into it, I may need to bring my mother and my littlest sister with me (13) in which case I need a suitable detached apartment for them. This was one of my plans all along (apartment) and I also need to keep my little sister in her school district (one of best districts out here) so I know where I need to look

The girl; basically she commutes an hour away from me. I"m on the west end, she"s on the east ( for simplicity sake) we both want to move closer to work. We both recognize that we need to wait to move in, let alone buy property together. She also has about 20k put aside, so she is not in a position to match me on property regardless. She makes 80k I make 95k. She will make 100k in two years, I will make 130k.

The area I need to look in is all the way west, near me. Houses average $335,000. I"m looking @ $350,000 or below.


So, here is my plan and where I need advice. First and foremost. I owe my mother alot. It"s the least I can do to get her out of the situation she is in and to help my little sister in turn. At this point my mind is set on that.


Buy a house by myself with a nice suitable multi bedroom apartment / upstairs (whatever) with separate entrance for my mother and sister. Live there 2-4 (3-5?) years while putting money aside with the lady. When we both have enough saved up again for a down payment, buy something together (probably a compromise in terms of commute) and instead of using my first house to leverage the second - I"ll keep it. Give the house itself (in terms of living space) to my mother and sister, and then in turn rent the "apartment" portion. This should, at the very least cover the expenses of the house. As a plus, the area is a very white, suburban family environment. Very easy to rent to a family (best renters)

So figure i"ll net 0 on the primary house. However, and this is primarily where I need advice or insight; i should have monster tax deductions right? Property tax / mortgage interest on first house (which should then put me in the green come tax time. asset building + huge tax return) and also the obvious tax deductions from the second home.

Then, what i"m thinking is; say 4% mortgage interest .. it doesn"t even pay to pay down the balance at such a low interest rate. I will just make minimum payments and use the deduction while investing the rest .. especially immediately after buying my first home in order to begin saving for second.

Thoughts?

Do you earn enough income that a bank is going to loan you ~$700,000 worth of mortgages simultaneously?

Also don"t bank on being able to get as low an interest rate on the 2nd home as you did on the first, unless your income is WAY overqualified for such an amount.

My father has a primary home and a lake home, and his lake home"s mortgage is a good 2% higher than his primary home. A 2nd mortgage is almost always more, whether its both mortgages on one property, two, or whatever.

I"d maybe ask your mortgage person, hypothetically as of right now, what kind of rates you would get(or if you would even qualify for) a 2nd loan.

Yeah, you"ll be pulling in more income once you vacate the first house, but you won"t have any past history of that income yet when you initially apply for that 2nd mortgage. You might have to suffer through a bad interest rate for at least a few years until you can refinance with a much higher income from the rent you"ve been pulling in from a few years

Your plan sounds strange. First, I doubt very much you can net zero on the primary residence if your family is occupying a part of it. Secondly, a building with multiple separate entrances is an atypical unit, and will turn off many potential renters. Duplexes and such attract starter families, more established renter families will want a traditional SFH, so I would expect higher turnover if you go this route. Also, the investment will be less liquid than a traditional SFH.

I would double check what exact tax deductions you get on the second home. I know I cannot deduct any mortgage interest unless its my primary residence, and the mortgage interest rates on investment properties are much higher.

Next, I would consider what would happen in 4-5 years when your sister goes to college, and presumably leaves the house. It may not make financial sense if you no longer need to house both people and are not limited by school catchment areas.

Lastly, do not buy a house with your lady until you decide to get married and have combined finances.

splorge said:

Lastly, do not buy a house with your lady until you decide to get married and have combined finances.

Click to expand...

1000 X this

I can"t tell you how many friends I"ve had get royally screwed from taking out loans with a boyfriend or girlfriend(mostly cars, but a few homes).

Best-case scenario if you break up is she walks away from it and you are responsible for the entire loan when she stops paying on it, and now you have to try to re-finance with less income than the both of you had combined.

Worst-case scenario you have to both get lawyers and fight over who gets the property and who owes how much money to the other person.

I am by no means an expert, but I think you are going to run into issues on your second loan. With you and your SO"s combined income, your income-to-debt ratio should be enough for a second ~$300,000ish home. Problem is that your personal debt-to-credit ratio is going to be high due to that first mortgage under just your name. That can effect your interest rate on the 2nd home, along with the complication of having a 2nd home.

Also, I wouldn"t call the tax deduction for interest/taxes massive. I think my interest saved me ~2-3 grand on my tax liability. Maybe that is massive to you, I don"t know.