Chicago Illinois Real Estate Blog

As home prices continue to drop, consumers are taking a harder look at rent-to-buy options, in which potential homeowners commit to a multi-year lease with a future option to buy the property.

Here’s how it works: Instead of outright purchasing a property, a potential buyer draws up a contract with a seller in which the monthly rental payments, based on the home’s value and often above going rates, count toward an eventual sale. All rental payments made pay down the principle if the renter decides to exercise the pre-paid option–typically 1% of the sale price–to buy.

The date at which the agreement expires varies by contract but is typically between two and five years. At that point, the renter can choose to buy the home at the original listed price minus the equity he or she has built. If not, then the homeowner has the option to evict them and keep all payments.

Why would a seller concede to such an agreement? Well, it’s not easy to sell a home these days. Last year the National Association of Chicago Realtors reported 4.9 million transactions; at the height of the boom, in 2004, 8.5 million new and existing homes were sold. Instead of letting a home sit empty, sellers are looking for any income stream they can tap. Mix in the tight credit market that makes it difficult for anyone still thinking of buying to do so, and it’s easy to understand why this particular brand of transaction looks viable.

"With the tight credit market and stricter down payment requirements, rent-to-own has emerged as a trend for people who otherwise would be home buyers," says Eric Mangan, spokesman for For Sale by Owner, a real estate listing company. His company has started offering sellers the ability to list a home as rent-to-buy, given what he calls a surge in demand.

Of course, there are pitfalls. If a renter eventually decides not to buy, not only do his rental payments disappear, but the premium option fee he has paid for the right to buy also evaporates. In addition, if the price of the home goes down considerably over the next three years, then the renter has been paying a rate based on that amount and will find himself overcharged.

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