IndiaPost.com - Higher payments on lease-purchase deal

Dear Steve,

I'm considering a rent-to-own program where a realty company will buy a home for me and I will pay for 14 months while I repair negative credit. After 14 months, I will buy the house at a locked-in price. Does this sound legit? I'm a single parent making $70,000 a year but am having trouble coming up with a down payment, plus I have past credit and tax issues. Since this is now a buyer's market, I thought I'd better act.

-- Stephanie

Dear Stephanie, The vast majority of these programs are legit and there's no reason to suspect the company that you mentioned (but is not named here) would not be on the up and up. In fact, we're hearing more and more from potential buyers these days about such rent-to-own arrangements because they're typically offered by real estate companies as a way to jump-start activity in sluggish real estate markets. A big selling point for rent-to-own, also called "lease-to-own" and "lease-purchase," is that the lender usually requires little or no down payment and will carry a mortgage you may not be able to get on your own.

In some cases -- not in yours from what you describe -- the buyer gets to "test-drive" the house and neighborhood without a long-term commitment while getting a feel for the joys and obligations of homeownership. You'll probably be expected to handle maintenance on the house during the lease portion, by the way. As part of the rent-to-own arrangement, a tenant typically agrees to pay above-market rent (20 percent and upward) over a set period to build up the equivalent of a down payment with the excess.

The buyout price at the end of that period is usually at least 110 percent of the price the investor or company originally paid for the house. Yes, you will be locked into a purchase price, though that may not be the plus it was five years ago when values were soaring. In fact, values may not improve at all in the next year and some may even continue to drop. If they do drop, then in late summer 2008 you'll be buying at yesterday's higher prices.

There is another caveat. The 14-month period you're given may not be long enough to sufficiently repair your credit to qualify you for a lower mortgage interest rate. Realtors who are experienced with these transactions say a two-year period is better in a program that also includes credit counseling. Many would-be buyers, they say, discover they can't sustain the high payments in the long term for the same reasons they couldn't buy outright in the first place.

That begs this question: If you're going to summon the discipline to clean up your credit over a given span, why not start now and position yourself to buy conventionally instead of risk losing that added premium you'll be paying each month? By the way, I much prefer a lease-option arrangement where you retain the legal right to purchase the property after a given period but aren't expressly required to buy it.

Some won't accept those terms; others will. Incidentally, some of these programs' terms are much more flexible than they were a few years ago now that buyers have more leverage. Don't be afraid to negotiate a better deal. Good luck on getting into your own dream home. But be prudent and realistic in the process!