Rent-to-own home deals surge in popularity

Mic Smith
The Post and Courier

Margaret Ostergard, with Weichert Realtors, talks about the troubles selling her townhouse at The Albemarle in West Ashley.

Margaret and Warren Ostergard are ready to try something different.

Their three-bedroom, upscale townhouse at The Albemarle in West Ashley, listed at $594,900, hasn't attracted much interest since it was put on the market a year ago. But the Ostergards, who work for Weichert Realtors-Dean-Kelby in Mount Pleasant, say being flexible and open to a different kind of transaction — a lease-option contract — could help them catch a buyer's eye.

"When the market's bad, everybody gets creative," she said while showing off the home's gourmet kitchen.

The fallout from today's real estate slowdown has opened a gap between buyers and sellers.

Mortgage lenders have tightened their standards, cutting a portion of aspiring but riskier homebuyers out of the market because of their less-than-perfect credit scores.

At the other end, many homeowners have had trouble selling their houses, leaving some with second-mortgage payments for other properties — some of them far from Charleston.

For some buyers and sellers, one solution is a contract known in industry parlance as a "lease to purchase option" agreement.

Here's how it works: A buyer agrees to move into a house and purchase it a year or two later. In the meantime, the buyer makes rent payments while saving for a down payment and building or rebuilding credit.

Homeowners, in return, get a steady cash flow to pay some or all of the mortgage until the sale closes.

The concept isn't new. But amid the one-two punch of the housing slump and the credit crunch, lease options are becoming more popular, though the deals pose risks for buyers and sellers alike.

New demand

The lease-option concept is a by-product of the boom years, when speculative investors acquired options to buy homes, waited for real estate values to appreciate and sold their options for a profit, said Rachel Lindsay, chief executive of P&L Management Properties in Summerville.

Since then, she said, the idea "has been plagiarized and altered to meet a different kind of demand."

In the current market, lease-option agreements can grow the pool of potential buyers by attracting purchasers who are not quite ready to qualify for a mortgage. They also can be attractive for would-be buyers who have relocated and are trying to sell homes in other parts of the country.

"They're a way that a lot more people can get into homes," said Deborah Jones, broker-in-charge of Structure One Real Estate in North Charleston.

While agents don't play a formal role in lease-option deals, they can advise homeowners and prospective buyers to consider them. For instance, Jones is marketing a three-bedroom home in The Park at Rivers Edge in North Charleston as a potential lease-option buy.

The concept seems to be catching on locally.

So far this year, about 700 homes have been listed on the Charleston Trident Association of Realtors' Multiple Listing Service as available through lease-option contracts, accounting for nearly almost 3 percent of all listings. Four years ago, the figure was less than 1 percent.

While those numbers are relatively small, Sam Berry, business professor at The Citadel who nearly sold an investment property through a lease-to-buy arrangement, said he expects them to increase.

Learning curve

Lease-option contracts are written for individual homes and situations, so there are few fixed rules. However, both parties usually agree on a few general criteria.

The contract usually states that the buyer has to close on the residence within certain time period, usually a year or two. Homeowners avoid longer contracts, because of the risk of losing too much on the upside should real estate values appreciate quickly.

Also, buyers are required to put down a hefty upfront payment, usually between $3,000 and $5,000 for a typical home. In some cases, that money is put toward the eventual down payment.

The buying party also pays rent, giving the owner a monthly income stream to pay or offset the mortgage. Typically, a portion of each payment is set aside for the down payment.

Sometimes, homeowners pass on the costs of maintaining the property and paying property taxes, insurance and homeowner association fees.

"(Homeowners are) still having to make all those monthly payments, and it gives them some relief from having to do that," Hunnicutt, an agent with Keller Williams Realty who has noticed a growing number of inquiries about lease options from sellers and buyers.

A big attraction for some prospective buyers is that the contracts give them time to repair their credit or straighten out their financial situations. Also, buyers can build up equity in the house if values rise during the rental period.

"There's a million reasons why a few extra months would make or break the deal," said Lori Nolan, an agent with James Island-based Trademark Properties. Risky business

One of the draws for homeowners is that they usually can count on lease-to-own buyers to take better care of their properties than conventional renters, namely because they have mutual interests in the home.

"I had a wonderful group of guys who once put $400 worth of plants in the yard," said Bea Smith, a Charleston resident and real estate investor who has sold several properties in California through lease-option deals.

Smith, who said she would be willing use the technique to sell her investment home near West Ashley's Avondale section, has also seen her share of lease-option deals fall through for various reasons.

In those cases, she had to deal with angry people who lost hefty deposits, as well as irresponsible tenants who neglected the property once they realized they couldn't close the deal.

"Anytime someone rents a property, it's a risk," said Susan Klavohn Bryant, an agent with AgentOwned Realty who has listed lease-option properties.

Would-be buyers also face risk. For example, they need to understand the fine print. In some states, such as Florida and Texas, regulators have uncovered deceptive lease-option promotions, in which people signed contracts that allowed them to be evicted for unreasonably minor offenses. Other questionable operators target buyers who they know would not qualify for a mortgage by the time the contract expires.

"There's so much room for misuse and abuse because there are so few parameters," said Lindsay of P&L Management Properties.

But experts said those who are serious and take steps to limit their risk — such as buyers who know their credit and borrowing capabilities and sellers who check out the person of the other side of the table — can make the concept work to their advantage.

Reach Katy Stech at 937-5549 or kstech@postandcourier.com.