I know a guy who does lease-to-own deals.

He loves them, but I don’t think he discounts the monthly rent like that. He basically takes a deposit that allows the renter to buy the house at a specific price. If time goes on past a certain date, or if they stop paying rent, they lose the option.

If the buyer rents a while and walks away, he has some rental income and he the deposit is pure profit.

If the buyer rents for a while then buys, he has some rental income and he has sold the house at a profit.

I have never seen a lease to owen/own where the option was refundable. Thats the catch. The owner is hoping that you’ll walk away from it, or more likely that he can sell you an overpriced house. These schemes become very popular in a declining market.

Josh

Yes, you are right. It is not a good deal for the renter/buyer in most cases. My friend did many deals like this, and the stories are just insane.
Potential buyers are so blinded by the possibility to own the house (and try living in it risk-free for a while before the purchase) that they throw all reason overboard. They generally are willing to pay an upfront fee (the option), especially if they won or inherited the money. The other possibility is that they have bad credit. This gives them time to clean up the credit, and at the end they can buy the house at the agreed price. The agreed price is generally higher, i.e. 5-10% as you mention, or linked to the market.
There are stories of people putting down $50,000 in cash just to have the chance to own. After they lose their job or can’t clean up their credit, they miss a payment on the rent, and the $50,000 are gone. This happened sometimes after a few months of renting.
Most people walked away quietly, since they didn’t pay rent for a few months, and see their own shortcomings. At that point they don’t even care about the option payment anymore. Crazy!
This is one of the mistakes buyers and investors make: They think the house or stock is going up, and they stop considering any other outcome, including that they could move, lose their job, need money, or the price stays the same. But one has to consider all the outcomes and multiply them with realistic or even very conservative probabilities.

Here’s a lease-to-own listing. Flip gone bad looking for a succor. They are not hard to find.

List Price: $479,900 – $479,900
Purhcase Price 4/29/2005 $447,000
Bedrooms: 3
Full Baths: 2
Partial Baths: 0
Square Feet: 1,582
Lot Size: 6,098 Sq. Ft.
Year Built: 1959
Listing Date: 06/14/06
On Market: 157 days
Type: SFR
Status: ACTIVE
MLS #: 066050596

Description
Beautiful new kitchen w/ granite. New flooring throughout. Upgraded vanities. New roll-up garage door. Great price for nice clean home in quiet, established san carlos neighborhood. Private backyard w/terraced garden areas & views. Covered/enclosed patio (in sq. Ft.?). Buyer to verify all info. Prior to coe.

ZipRealty Price Track:
Price Reduced: 10/05/06 — $499,500 to $479,900
Price Reduced: 10/21/06 — $479,900 to $475,000
Price Increased: 11/03/06 — $475,000 to $479,900

ZipRealty Listing

Purchase Details

Craigslist Rent-To-Own Ad

I agree guys… Lease to own situations are almost always slanted in favor of the seller. I forgot where I read the stats but over 90% of the options are never exercised and the seller ends up pocketing cash.

I will say though that if you are a savy buyer with a good agent, your agent should be able to structure a fair deal for you AND should be able to protect your option money. Here is a for instance…. Let’s say you struck a deal (lease to own) for a home today. Say you pay 20k for the option to buy the home at the end of the lease term. However, chances are very good that a year from now the home will depreciate in value. Thus you better darn well make sure you have provisions in your agreement to protect you for that event. This is one of many things that can happen.

Make sure you know what you are doing if you are buyer.