This is such an important way for people with no credit to buy a house, that it deserved a chapter of it’s own. This is probably the most common method used to get into a home by people who are unable to qualify for a bank loan.
The Lease Option and/or Rent-to-Own Method
The lease option or rent-to-own methods lets you rent the house now and buy it after you save. This is one of the most popular ways for people with no credit to buy a home.
A lease option is an alternative financing option that allows home buyers to lease a home with an option to buy. Each month's rent payment may consist of not only the rent, but also an additional amount, which can be applied toward the down payment on an already specified price.
You might have to get a conventional loan eventually, but it will get you into your own house now, and buy you time to save money or slowly build your down payment, earn equity, and clean up your credit.
Actually, sometimes it is a better deal to rent-to-own than to get a bank loan. For instance, Carol and Bob found a home in a good neighborhood that had been vacant and on the market for 8 months. The asking price was $125,000. They made the desperate and frustrated out-of-state owner an offer that they would lease the house for five years with half of the $1000 rent payment going towards the down payment of the house. They would then purchase the home for the remainder of the asking price of $125,000. At the end of the five-year period, they had $30,000 in equity as a down payment for the house.
If they had taken a conventional thirty-year mortgage for $115,000 at 9% interest, they would have $10,000 in equity because of the “standard” down payment they would have paid up-front (outside of all the other closing costs), plus only about $4532 paid in equity on the loan for a total of less than $15,000 instead of $30,000 equity.
Working With Investors
There are several types of real estate investors out there, and one of them may be just the person who can help you get into a home of your own.
Lets talk about real estate investing for a moment. You’ve seen the infomercials, I’m sure. People in Hawaiian shirts sitting on tropical beaches who are making hundreds of thousands of dollars a month and want to tell you how to do it-- for hundreds of dollars of your hard-earned paycheck.
Let’s be realistic. Why are they spending their time selling a program when they could be out getting rich in real estate?
Real estate investing isn’t all it is built up to be. I know from experience. People can and do make money in real estate investing, make no mistake. But it is not easy or often very fun. They don’t spend a lot of time on the beach. They are repairing houses, keeping records, and evicting scary tenants. If the economy turns one way they make money, and if it turns another they lose lots of money. They may be getting burned out on the whole thing and ready to sell $500 tape series themselves. And they may be very happy to sell you one of their houses.
Watch for ads that say that they will buy houses for cash. Call them and ask if they are willing to do a rent-to-own deal on any of their available houses. Tell them what you have to put down (even just a month or two of rent) or if you are willing to work at fixing up a broken house for a down payment.
The New Breed of Investors
There is a new breed of real estate investor out there now. This one might be even better able help you. This is the “Don’t own it-- Control it” style investor. They make their money by being the middleman in a rent-to-own or lease option deal. They find a FSBO who needs to sell and is willing to take a 1-5 year lease with an option to buy on the house. They get the rights to sub-lease the house. They then turn around and find a person, like you, who wants to buy but has no money or credit for it, and puts that person in the house. Their goal, of course, is to make money on the deal- by making extra on the rent money and getting an “earnest money” deposit, which will go toward the purchase price of the house.
How can you help them by helping yourself? Well, one of the problems with this kind of investing is that they might get stuck with expensive rent payments and no renter. They may be very happy to get you into the home with little down. So tell them honestly what you can afford to put down. They may be negotiable on the subject.
One of the advantages of buying from one of these investors is that they often don’t care what your credit is, as long as you make regular on-time payments. And if you find the right kind of “Control It” investor, 100% of your rent and money down will go toward the purchase price of the house. It can be a very good deal for you. Watch for ads in the paper that say “rent-to-own” or “lease option” and “100% rent credit.”
This is a great way to go if you are reluctant to work with a FSBO and without a real estate agent, or if you feel insecure because you don’t know enough about real estate. It might be an easier and less risky way into your house. But remember that you are paying this person to help you. If you feel that what they do is not really anything you couldn’t do, and you would rather work with the FSBO yourself, go for it. You will save the money the investor would have made on you.
Important Information for Real Estate Investors:
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