This is a guest post by Kevin Mercadante at OutOfYourRut.com.
It’s almost hard to go a day without hearing how lousy the housing market is but if you’re looking to buy you may be able to find an unexpected advantage in all the bad news.
Though not many people do it intentionally, renting a house before buying would provide a number of incredible benefits if you’re willing to do some digging in the market. It’s kind of like test driving a car before you buy—same principal. I’m not talking about a lease purchase, or rent-to-own arrangement either, but a traditional rent-to-rent-and-maybe-buy-at-a-later-date kind of deal.
Think of it as a “Try Before You Buy” philosophy to buying a home.
Lease purchases are generally formal arrangements which spell out the terms of final sale in the agreement, and typically require a non-refundable deposit which will be credited toward the eventual down payment. The written agreement is actually a contract of sale with a temporary lease provision included. As neat and tidy as this seems, there are a couple of major negatives in there from the tenant/buyer angle.
First, if you fail to complete the sale, you’ll forfeit your deposit, and that deposit can be considerably more than a typical rental deposit. Second, you are locked into the agreed upon sale price. That would be an advantage if house prices were rising, but at the present time they’re going the other way. Imagine this scenario: you’re locked into a contract at a price of X when the market value suddenly falls to X minus 10% by the agreed-upon sale date. Now you’re faced with a choice of either paying too much for the house or losing your upfront money for failing to do so. Heads you lose, tails you lose.
Rent-to-Rent (Then Own)
On a straight rental arrangement you preserve all of your options, which can be a huge advantage, especially in the current market. Some of the benefits include:
- Negotiate a lower sale price. Not only will you get the lower future price if values continue to drop, but it is also likely your landlord will not have to pay a real estate commission & therefore will be more flexible in negotiating final price! It’s no secret that many homes are offered for rent in the hopes of securing tenants who might become a buyer, thus eliminating the need for an agent. You may also be able to gain a price advantage by the fact that you’re a buyer in hand, freeing your landlord from the responsibility of marketing the house or performing routine maintenance upon your departure.
- No moving or moving costs – you’re already there. One of the great financial stresses involved in buying a house is that you’re besieged by costs from every angle—down payment, closing costs, escrows, inspections, new furniture. True, you will have already paid for the cost of the move when you first moved into the house, but one major expense is removed since you aren’t paying it at the same time as all the other costs. It’s spacing out your expenses, which can be a blessing at the closing table. Plus the stress of a major financial transaction is reduced by eliminating the need to combine it with a complete uprooting of your life.
- No guess work on repairs, condition and flaws. As an existing occupant, you’ll know the real condition of the house as well as any issues that may not come up on a home inspection or appraisal, or that a real estate agent may fail to disclose. For example, an inspection conducted in the summer won’t disclose that a house is drafty in the wintertime. There are flaws and other serious issues that are only visible to a person living in the house.
- No guess work on the neighbors, the neighborhood or the school system. In the real world, you can fall in love with a house, but find the neighbors or even the entire neighborhood to be intolerable. This is especially true now that so many homes are located in homeowners association controlled neighborhoods (HOA’s). Some HOA’s are overzealous in their enforcement of certain provisions and in others the provisions themselves are close to ridiculous. A friend of mine and her husband recently sold a house in an HOA neighborhood that prohibited overnight parking—in their driveway! This isn’t something a seller or real estate agent would be particularly fond of telling you prior to closing, but as an existing occupant, you’d already know about it and whether or not you’d be willing to accept it.
Here is an excellent example of one couple who chose to Rent Vs. Buy and how they are putting the savings aside for a down payment on their future home! They are being very choosy and waiting until they can get exactly what they want! I think this is a very wise choice, especially considering today’s housing market.
Finding Acceptable Rentals
The good news in this market is that many of the houses that are offered for sale are also potential rentals. In many markets around the country, expected market times to sell a house are running close to year, and often more. A tenant may not be a seller’s perfect prospect, but eventually circumstances may force him to consider it. In short, view any property as a potential rental.
In most areas the number of homes marketed as rentals is small compared to the number that are for sale, so you can expand the number of rental prospects by investigating those listed for sale. Properties listed for sale by owner (FSBO’s) can be an obvious source, but houses listed by real estate agents can be investigated as well. In fact, consider making a rental offer on any house that you would consider as a suitable home for you and your family.
If the property is a FSBO, you can contact the owner directly with an offer to rent. Most will likely turn down your offer up front; that’s fine, leave them your name & phone number in case they consider the option in the future and move on to the next property. It is a good idea to target a specific neighborhood of your liking and employ this strategy.
It gets more complicated with a realtor listed property, but it’s still doable. Typically, when a seller lists his home with an agency, he is not allowed to accept offers outside the agent’s knowledge. But that exclusivity may not extend to rentals, as the seller has signed an agreement to sell, not rent, the home (check the laws in your state). However listings can and do expire without ever producing a sale (more so lately) and a seller is free to do what ever he chooses once it does. Same plan here, approach the owner, not the agent, with an offer to rent, leaving your name and phone number. You will most likely need to knock on the door to speak directly with the owner as all contact information on yard signs and marketing material will be directed toward the agent. In the likely event the owner isn’t home, leave a note on the door apprising him or her of your offer.
Tying it all Together
This will be a bit of a numbers game, and will be more effective if you can make offers on houses that have been on the market for six months or more, but approach enough sellers, and you may get a surprising number of parties interested in your offer, enough at least to provide a decent choice of homes.
It probably will be better if you don’t suggest any intention to purchase the home at some point in the future, leaving that proposal to the sellers. Whoever asks for the sale first is in the weaker position. No seller ever wants to rent his home as this will rarely solve all of his problems. But rest assured that even if he agrees to a rental, he will do so with the hope that you will be the eventual buyer. It is unlikely the seller will want to put it back on the market especially after being unable to sell on the first go round. You will be his first best choice as buyer by default.
If you find a home you like and the owner is willing to accept your rental offer, you can move in, “test drive” the house, the neighborhood (and the neighbors), as well as the school system.
What do you do if it all checks out? Wait for the owner to offer to sell the house to you; that will most likely happen sometime before your initial lease expires. When it does, you can move forward with 100% confidence that the home you’re buying is the right one for you. And you won’t even need to pack up your furniture!
Betterment is one of my two favorite ways to earn interest on my savings! They have an awesome program for the Average Joe to save and invest simply and effectively. There are no minimum balance requirements and no transaction fees. Read my Betterment Review or open an account to get started earning now.