Lease to Own in New Tampa

I have had a few inquiries about doing a lease to own on several of the rentals I currently have listed. Through several discussions, I have formed an opinion that a rent to own option has many risks to both the landlord and the tenant. This does not mean a lease purchase is not a good idea, but it is important to understand the risk.

There is risk to the tenant - or potential investor - looking to capitalize on the soft New Tampa Real Estate by locking up a low price on a home now without having to purchase it. A lease or rent to own contract generally includes some amount of money to be deposited with the seller toward the purchase price, with additional principal paydown coming with each rent payment. At the end of the option period, typically 1-3 years, the tenant / buyer will have paid a significant amount toward the purchase price that will be "equity" once they exercise the option and close on the home. However, with so many landlords being upside down on the mortgage, the chances of the landlord profiting from a lease to own much lower, specially if the purchase price is close to the market value today. Why would a landlord agree to such an option then? Well, the dishonest ones could let their home fall into foreclosure and keep the extra deposit and equity deposited by the tenant.

This to me is the single biggest risk for someone looking to rent/buy using a lease purchase option today. What do you do if the owner stops making payments and falls into foreclosure? I am not a lawyer and I am sure plenty of lawyers will explain how to legally handle this situation, but the bottom line is a option to purchase a property at some point in time in the future does not prevent a lender from foreclosing on a homeowner that stops making mortgage payments. So, if you get a lease purchase contract from someone desperate to get out of their home with a 3 year option to purchase at a great price, the deal still could be too good to be true. In fact, even if they honor the contract, if the purchase price leaves the seller needing to bring money to the closing table and they do not have the funds, the deal could still fall through and the money given to the seller toward the purchase price could prove to be hard to cover. It is hard to get money from someone that does not have any and in this market there are many landlords that made a bad investment that have used up all of their assets.

For landlords, there is also risk. Giving an option to a tenant prevents the owner from being able to sell the home on the open market until the option expires. With home values in New Tampa dropping to levels last seen in 2004-2005, giving an option at these prices may not be the best investment decision to landlords. If the prices go up, the tenant can exercise the option and the landlord will lose the equity gained. The owner could be upside down on the mortgage and want to sell quickly if prices go up, but will not be able to. If the prices go down, the tenant will not exercise the option and the landlord will still be stuck with a home worth less. Then the owner will be looking at possibly offering another option at a lower price in order to attract another buyer/tenant. So, the question is why would an owner want to give an option? The only real answer is to "lock up a tenant" and minimize losses on a rental home. There is a better way to accomplish this by hiring a property management company that can find and place tenants quickly.

There is also another risk of a lease to own tenant. The tenant buyer could never be able to exercise their option due to credit issues or debt that prevents them from qualifying for a loan. When this realization occurs, the tenant will change from one living in a home to one they will eventually own, to one that feels they "lost" the equity they put into the home. This tenant could start to treat the home much differently and cause significant damage. The tenant could also stop paying and force the owner to evict them.

In the New Tampa market, the surplus of inventory has caused both rent and sale prices to decline since last year. Gambling on one or the other moving in a direction that will make this something to profit from, is more of the same speculative behavior that has hurt the New Tampa Real Estate market to begin with. It is something I will personally discourage for all owners and tenants in 2008.