It's still a viable option for
those short on cash or credit
By Annemarie Mannion
Special to the Tribune
Published January 30, 2005
Talk about being in the right place at the right time.
After many years as a renter and trying, but failing, to amass
the money for a down payment on a purchase, Nilda Rodriguez,
51, thought she might never achieve her dream of becoming a homeowner.
But, last February she bought a $150,000, two-bedroom, two-bathroom
condominium in Elk Grove Village. Besides having $8,000 in hand
for the purchase, she didn't even have to move.
"I have a fourth-floor corner unit. No one is living on
top of me and no one is next to me. It is the same unit I had
as a renter," she said.
Rodriguez, who works as a quality engineer, acquired the money
for her down payment by doing what she had for many years: paying
Although their terms may vary widely, rent-to-own or lease purchases
essentially are rental agreements with an option to buy the property
at pre-negotiated terms.
With low interest rates and the availability of no-down-payment
mortgages for the creditworthy, renting to own is less common
today than a decade ago. Additionally, not everyone sees rent-to-own
as the wisest path to homeownership.
But, it still is an option, especially for the entry-level buyer
who may find it very difficult to accumulate a down payment,
The developer who converted Rodriguez's complex, 12 Oaks Condominiums,
offered tenants -- and anyone else interested in buying a unit
-- the opportunity to apply up to 10 months of rent payments
toward the down payment.
Helping tenants overcome the financial hurdles to homeownership
makes sense for the condo converter, said Rose Barnhart, managing
member of Billy Bob Marketing LLC in Rolling Meadows, which converted
Rodriguez's unit and is converting other apartment complexes
"When you're a developer, your existing resident is your
prime prospect," she said. "If they don't purchase,
then you're stuck with a vacant apartment and you've got to work
to get someone else in there. It's really the most economical
thing for us to do: Work with the existing tenant."
The conversion of 12 Oaks at Elk Grove Village is complete. Barnhart's
company also is converting 692 units at 12 Oaks of Woodfield
Condominiums (formerly Woodfield Gardens) in Rolling Meadows,
60 units at 12 Oaks at Morningside Condominiums (formerly Morningside
Apartments) in Hoffman Estates, and 176 units at 12 Oaks at River
West Condominiums (formerly River West Apartments) in Mt. Prospect.
Barnhart works with AmeriDream to assist borrowers with down
payments, which are awarded as gifts that do not have to be repaid.
She said she works with the non-profit organization because developers
are prohibited from giving buyers the money for down payments
It works this way: AmeriDream grants the down payment from its
pool of funds. The down payment is removed at closing from the
developer or builder's proceeds and a $300 fee is charged to
Vicki Buresh, account executive for AmeriDream in Glenview, said
about 20 percent of the units at 12 Oaks at Elk Grove Village
were sold with down payment assistance from AmeriDream, which
is based in Gaithersburg, Md.
"I think that's a pretty significant number," Bruesh
Though 100 percent financing on home mortgages is more available
in than the past, "there is traditionally a much higher
credit rating associated with being able to get it," she
said. "That's been a stumbling block for many people. It's
still out of reach to many people."
The terms of rent-to-own deals vary widely.
"Every deal is a little different. Every state has different
laws," said Gary Foreman, editor of The Dollar Stretcher,
a Web site based in Bradenton, Fla.
Citing low mortgage interest rates and the increased availability
of no-down-payment loans, Foreman said he does not see renting
to own done as often as it was in the past.
"I think it was a more popular strategy 10 years ago,"
he said. "It enabled people to make a monthly payment, but
not have to come up with the down payment."
Gail Lissner, vice president of Appraisal Research Counselors
in Chicago, said that renting to own is still a viable proposition,
particularly for entry-level housing.
"It's been around a long time -- as long as condo conversions
have been around," she said. "Usually it is something
you see with entry-level projects. It is helpful to people who
have trouble coming up with the down payment."
Besides allowing some renters to acquire a down payment, renting
to own also helps people who may need some time to improve their
The Sanctuary of Arlington Heights, a 96-unit condo conversion
in the northwest suburb, is allowing tenants to put three to
four months of rent payments toward their down payments.
"That's 100 percent of their rent. It's three or four thousand
dollars. It's pretty generous," said Mary Corbett, president
of Success Builders in Bloomingdale, which is marketing the conversion.
"Some people come in and they can do a straight buy. Others
need to do a credit repair. They need a few months to show that
they're moving forward with improving their credit," she
Steve Holland, president of New Millennium Mortgage in Naperville,
is handling financing at the Sanctuary. He said renting to own
makes sense for people who want to get into the housing market
but have put it off for any number of reasons.
"There is a huge misconception out there that people should
wait until they save for a down payment or wait for a raise or
wait until they fix their credit," he said. "By getting
into a rent-to-own situation, they can lock in on a sale price
and then, when they close on the home, it might be worth more."
Barnhart said her company also works with tenants who need to
improve their credit. "We will work with them over a 10-
or 12-month period. It takes a lot of work and sometimes they
fall off the wagon," she said.
Knowing that they can own a condo in less than a year, however,
"provides a lot of motivation. They know that in 10 months
they're going to have a nest egg" to apply to purchasing
their unit, she said.
Condo conversions are not the only place where renting to own
The newspaper classified ads were how Linda and Alan Smolek found
a five-bedroom house in southwest suburban Alsip. They agreed
last fall to rent the house with an option to buy it.
"I'm renting right now because that's the best thing for
me," said Linda Smolek. "But we have the option to
buy it [in a year], and the price for the house is set."
Though they may not buy the brick and cedar bi-levelfor a year,
they and the owner have agreed that the purchase price will be
$275,000. The Smoleks also can back out of the deal in a year.
Renting to own, or renting with an option to buy, can be a way
for a prospective buyer to check out a neighborhood or house
before they make the commitment to buy.
"You can become more familiar with the property. You may
find out that what looked like a quiet street isn't or that the
closets aren't as big as you thought they were or that you don't
like your neighbors," said the Dollar Stretcher's Foreman.
Renting to own also may work for people who are undecided about
their futures, he said.
In the Smoleks' case, Linda said they had sold their previous
house because they had planned to retire to Florida. But Alan's
job promised greater retirement benefits if he stayed longer
in it. Now they are not sure when, or if, they will be moving
"We don't know exactly what we're going to do," said
Linda. "Thirty years ago, my husband said, `When we retire,
we're moving to Florida. It's been 30 years and we're still here.'"
The Smoleks are paying $1,750 a month in rent. Their arrangement
does not allow their rent go toward the purchase. However, the
purchase price is set and they, and the owner, expect the house
to appreciate in the next year.
"If they buy the property at $275,000, I win," said
J.T. Foxx, the owner. "Because I get cash flow [for the
year] and a better tax advantage."
Foxx is president of the Second Chance Program, which has offices
in Des Plaines and Lincolnshire.
Joerg Seifert, a real estate attorney in Elmhurst, said rent-to-own
deals are "attractive to sellers because they can spread
their capital gain out over several years," he said.
Some sellers may have special situations that make a rent-to-own
Carol Vicich, a real estate agent with L.W. Reddy in Elmhurst,
cited, as an example, an elderly homeowner in a nursing home.
A rent-to-own deal was arranged by his family because his house
was in a living trust and could not be sold until he died.
Seifert cautioned, however, that there are hazards.
"There are dangers to look for. If a tenant is in default
or misses a payment, they could lose everything that have put
into it," he said.
He said the specifics of any contract should be reviewed by real
estate attorneys for both parties.
"Don't sign anything until your attorney reviews it,"
he said. "A real estate attorney should be able to see if
it is legitimate in just a few minutes."
Barnhart added that anyone buying a condo should consider what
improvements the developer is putting into the property and should
get a copy of the property report.
The "biggest problem" for people in a rent-to-own or
rent-with-option situation "comes when people aren't changing
their financial behavior so that they eventually can qualify
for a mortgage," said Dru Bergman, interim executive director
of the DuPage Homeownership Center.
She cautioned that people have to be aware of the specifics of
their deal. They may, for instance, have to exercise their option
to buy within a certain time period -- a year, two years or three.
If they cannot qualify for a mortgage within the specified time
and don't exercise their right to buy, they may lose the money
that they have put toward the rent or down payment.
The center no longer offers a rent-to-own program because buyers
are better served by improving their financial pictures first
and then moving on to the next step of buying a house, Bergman
Instead of renting with the option to buy, she recommends that
people start practicing for the reality of paying a mortgage
as they rent by paying their rent plus putting an additional
amount into savings or into reducing their debt.
"People don't always want to hear this because it's harder
and they won't get the house they want right away," she
Mike Pappas, co-owner of JSC Investments LLC in LaGrange, said
his rent-to-own deals require a tenant/buyer to put down 3 to
10 percent of the property's purchase price for the option to
purchase the property.
"There's no security deposit. It [the option to purchase
money] is non-refundable. It acts like a down payment. It's fully
applied to the price," he said.
In addition, he applies a percentage of the monthly rent payment
toward the purchase price, assuming the payment is received on
"I'll put 25 to 33 percent of the rent payment toward the
purchase price. If they're late, they lose that credit. It gives
them an incentive to pay on time," he said.
His tenant/buyers, he noted, are a bit different from those who
do not have money for a down payment.
"It's typically people who have up to 10 percent [for a
down payment] but have compromised credit. I will work with anyone,
no matter what their credit, but that correlates to how much
they need to put down," he said.
"There are people who have the money for a down payment,
but because their credit is poor, the interest rate and the payments
they would have [by buying] are high," he said.
Pappas also requires tenant/buyers to do household maintenance
such as clearing drains and mowing the lawn -- a common arrangement
in the rental of a house versus an apartment. Major repairs,
such as replacing a furnace, would be his expense.
The Smoleks also do everyday household maintenance and have painted
their home to their own tastes. If they move to Florida, Linda
Smokel said they may sell the house to their two college-age
sons. Though they do not know where their future will be, they
said renting to own is better than renting.
"When you rent, all you have at the end of the year is a
bunch of rent receipts," she said.
Being a homeowner, added Rodriguez "is beautiful. It is
a good feeling."
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