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Powerful Advantages of Renting a Home Before Buying

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Powerful Advantages of Renting a Home Before BuyingThis 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 Purchase

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!

Financial Philosophy & Sacrifice to Create Wealth & Live Off Your Interest

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Do you have a Financial Philosophy?  How much are you willing sacrifice to become debt free?

Over the course of the last week or so I have drawn several noteworthy conclusions about myself, my life, my family, and my financial goals.  When I say “family” I am referring to my wife & I.  Currently it is just the two of us, but I still consider us a family.

I recently discovered that my financial mindset was faulty, in several distinct ways.  This faulty mindset is not something I will look to blame on anyone, rather it is a mindset that is shared by a vast majority of middle class folks such as myself.  Even since my financial awakening in January of 2009, I still had an errant view of finances.  Here are the 2 distinct problems with my previous thought process:

  1. I thought the best financial plan available to me was to save money I earned and pay cash for things.
  2. I did not have a financial philosophy.

Yes, you read that right, saving money I earned to pay cash for things is an errant financial though process.  Let me elaborate.

Saving Money To Buy Things is NOT the Best Option

While saving money to pay cash for your purchases is a wise decision, it is NOT the best financial decision.  What about saving your money in order to pay yourself?  How does that sound?  It may sound great to some, but may sound unrealistic or like somewhat of a foreign concept.

You may be thinking, “Yeah, that sounds great…if it were possible!”  I am here to tell you today friend…it is VERY possible.  It will take some time, but living off the interest of your own money is something wealthy people have been doing for many, many years!  Therein lies the difference between a wealthy mindset, and a middle class mindset.  I have now adopted the wealthy mindset and I urge you to do the same!

There are several things that you need to do before your money can start paying you back.

  1. Figure out how much your money is paying someone else – Go through all of your expenses and figure out your interest amount paid to others.  This will give you a painfully obvious & realistic overview of how much money your interest is already earning other people.  Now consider for a moment, if some or all of that money were going where it belongs…into your bank account.
  2. Work out a plan to reduce your debt so you can begin paying yourself – Sacrifice, sacrifice, sacrifice!  This is the key.  If you read over the archives of Debt Free Adventure you will notice a common theme; my wife & I are finding ways to sacrifice so we can attribute larger chunks of our money to debt repayment.  This, in turn, will cause less & less of our interest money to go toward paying others, and allow us to start saving it so it can begin paying us instead!  Here is one very specific example of how we are sacrificing by eating more beans instead of meat to save hundreds on our monthly grocery bill.
  3. Begin saving & investing your money – You do not have to save tons to watch it accumulate.  In the beginning you should attribute more of your funds to debt repayment, but make sure you save at least some of it.  Develop a plan, set savings goals, and automate the withdraws so you don’t have to think about it at all.  Here is a great article if you are overwhelmed by your present financial state that will help you put all of this into perspective.
  4. Patiently & faithfully stick to your plan – You are not going to be able to wake up tomorrow, quit your job, and begin living off your interest…so the sooner you lose this idea the better.  Realistically the entire process will take years, but is entirely necessary to build your financial strength and fortitude.  Waiting on the Lord and meditating on His Word is the best medicine for you.  Read Psalms & Proverbs to gain wisdom & patience.

Hopefully you are starting to see the pattern.  Sacrifice in order to pay down debt, develop your plan, and save your money, and trust in the Lord.  It may take awhile, but within a few years you will see a noticeable difference.  This is not going to happen overnight, nor should it.  It is good for you & your family to go through the process of getting your financial house in order.  It is also good for you to do so over a long period of time.  It will help build your character and will help establish & grow you financially, emotionally, and spiritually.

Develop your Financial Philosophy

Your financial philosophy can be as long or short as you like but should embody your overall financial goals and how you plan to achieve them.  I chose to establish a very short philosophy so I can easily tattoo it in my mind and incorporate it throughout my entire life.

  • “Sacrifice now to benefit later.“

That’s it folks.  That is my entire financial philosophy in one short statement.  Use your imagination to expound the depth and breadth of it.

Take a good look at your overall financial state, where you would like to be, then develop your own philosophy to help you get there as soon as possible!

Concluding thoughts on sacrificing…

Jesus gave us the ultimate example when he sacrificed His own life to save ours!  It makes sense then that in order to save, we need to sacrifice.  What are you willing to give up in order to reach your goals?

I can become financially free much quicker if my wife & I choose to sacrifice more.  As you might expect, the greater we sacrifice, the sooner we will reach our goals.  Will it take us 30 years, 20 years, 10 years…how about 5 years?  It all depends on how far we are willing to go.

Most recently we have been discussing selling our home.  If we can sell it and avoid taking much of a loss, we will most likely do just that.  If we do sell, we plan to rent an apartment or condo for around $500/month.  That would save us over $900 on the mortgage, taxes, & insurance alone not to mention all of the money we would save on home maintenance.

We are also considering becoming a one car family.  I was recently in a car accident (I’m okay) which required my Jeep to be in the shop for the last few months.  Because of this experience we have learned that we can get by with only one vehicle.  It may seem impossible, but remember that you get used to where you are, no matter where you are.  If you have 5 cars, it will hard to imagine cutting back to 4.  If you have zero cars, you will find a way to get used to that as well.

I will expound on the latter points in new posts over the course of the next few weeks so be on the look out.

DFA is passionately dedicated to helping others break the bondage of debt using biblical principles.

Help When Overwhelmed by Personal Finances – DFA Tip of the Week – 4/13/2009

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There are many ways to reduce costs in our every day lives, so to help do just that each Monday I will post a money saving “Tip of the Week”.

“And he said unto him, Well, thou good servant: because thou hast been faithful in a very little, have thou authority over ten cities.” Luke 19:17

This weeks tip involves…Getting Started.  I want you to consider the following quote, then read the rest of this article.  By the end you should be well equipped to get started on your very own Debt Free Adventure!

“A journey of a thousand miles begins with a single step!”  ~Lao Tzu

The Trap…

All of this Personal Finance business can be overwhelming!  Debt repayment vs. Reduce Monthly Bills vs. Saving & Investing, etc.  While all of these topics require your necessary attention, it is important that you do not focus on everything all at once.  You need to start somewhere, so here are a few tricks you can employ to get yourself started without falling into the trap of idleness.

Tips to Avoid the Trap…

To get your finances in order break them down into the 3 following main groups:

  1. Debt Repayment – Make a simple list of all the “consumer debt” you have including auto loans, credit cards, department store cards,  student loans.  Write down each debt, how much you pay toward it each month, and then add the debt of each up to come up with your total debt amount.
  2. Monthly Expenses – Write down all your monthly bills and how much each costs you per month (if amounts vary, come up with a guesstimate average).
  3. Savings and/or Investment Accounts – Make a list of all your savings accounts and investment accounts and write down how much you contribute toward each.

Once you have the above completed you are REALLY CLOSE to having created your very own budget!  That is the next step…finish these steps to complete your budget:

  1. Write down your monthly income – Do not budget weekly, bi-weekly, or any other way…budget monthly.  Write down how much monthly income you have from all sources.
  2. Write down all outgoing expenses – In a 2nd section, copy the information you compiled above regarding your monthly debt & expense costs and jot them all down and subtract them all from your income.
  3. Add any other expenses – You may have forgotten to write down groceries, gasoline, etc.  Figure any other expenses you have each month and add them to your “outgoing expenses” section to arrive at the total amount you spend each month.

Now that you have your first rough draft budget done, go celebrate by eating a cookie, dancing the jig, or doing anything else to express the joy you feel that comes from getting started on the path toward financial freedom!  When you are done dancing and eating dessert, look over you budget one last time to make sure you didn’t forget anything.  Ask your spouse to proof-read it as an additional check to see if you have left anything out.

Now commit to the following…

Now that you have your budget, you have your expenses, debt, income, & savings all written down and can start to wrangle everything in.  Commit to the following:

  1. Give 10% to the Lord – Read my Testimony to the Tithe and see how the Lord promises to bless you if you give, but also promises your indebtedness will continue if you do not.
  2. Contribute any amount to savings automatically – Transfer any amount, no matter how small, into your savings each month.  Even if it is just $20/month, make a promise to yourself that you will pay yourself that $20 instead of paying it in interest to some big bank.  Try to make this an automatic thing.  I HIGHLY recommend switching your banking to Capital One 360 to make all this easier.  Read about how I use Capital One 360 for debt repayment and emergency fund savings…and remember…this is all spoken from personal experience!
  3. Reduce your monthly expenses – follow my advice and work to reduce each of your monthly expenses, but do so one at a time.  Commit to calling one service provider a week to see about either switching, reducing your plan, or discontinuing that service altogether if possible.
  4. Tweak your budget – Your budget is a “living document” and should be given attention on a weekly basis.  Think about how you can reallocate your money after you reduce your monthly bills as we discussed above.  Continue to contribute more and more toward your debt repayment, and I advise you to focus the majority of your funds on this until your debt is greatly reduced.  Once your debt is considerably lower, begin contributing more toward your savings each month.  I currently employ a 75/25 plan where 75% of my available funds go toward debt repayment and 25% go toward savings.  Do what works for you, but again…I urge you to focus the majority on debt repayment!

Follow these simple steps to get started and remember to break tasks into their respective groups and tackle things one at a time.

Memorize the following quote:

“A journey of a thousand miles begins with a single step!”  ~Lao Tzu

Click here to see all our past DFA Tips of the Week.