What You Should Know About the Long Island Rent-to-Own Market

Amo Realty periodically has rent to own listings. We also pitch applications to sellers to see if they will accept a lease with an option to buy.

As a dynamic and diverse real estate market, Long Island offers many opportunities to prospective home buyers and investors. You can purchase a property outright or through mortgage lending; plus, you can execute land contracts, search for co-op arrangements, negotiate owner-financed deals, or enter a rent-to-own agreement. The latter method, also called a lease-to-own contract, presents an advantage to prospective buyers when market conditions are not the most favorable.

Long Island is a prime housing market, and this status began during the Gilded Age, more than a century ago. Wealthy individuals started building summer mansions on the Gold Coast after World War I, thus establishing it as a prestigious and exclusive area. Decades later, the development of Levittown hamlet for veterans returning from World War II sparked a wave of homeownership that was accessible to the middle class, thus promoting a higher demand for Long Island homes.

The affordability factor generated by the Levittown project has become elusive in recent years. While the market has experienced various fluctuations, Long Island has remained a sought-after location thanks to its proximity to New York City, excellent schools, diverse communities, thriving job market, and overall quality of life. Unfortunately, housing affordability has not been constant; the market has gone through long periods of high demand and heavy speculation, thus creating a shortage of affordable housing units. When you add consumer price inflation and stagnant wage growth to the mix, many prospective buyers get priced out of the market.

In some cases, house hunters barely "miss the market" because their credit score is just below the qualifying threshold for the mortgage package they are interested in. In other cases, prospective buyers do not have the full down payment. What these buyers need is time to either improve their credit score or save up for a down payment plus the three months of cash reserves that many lenders require these days. This is when rent-to-own agreements can help prospective buyers re-enter the housing market.

Rent-to-own contracts apply to residential properties ready for occupancy, so they can be detached single-family residences, attached multifamily units, apartments, lofts, and condos. If you see a listing for a rent-to-own property on Long Island, the seller wants to collect rent and give you an option or obligation to purchase down the line. This is ideal if you need time to fix your credit or save for the down payment. Beyond improving your financial situation, a rent-to-own arrangement can also help you lock down the property with a reasonable purchase price; this is crucial when navigating a seller's market underscored by rising prices and high demand.

The number of rent-to-own opportunities on Long Island will vary according to market conditions and location. If the market goes cold and nobody is buying, you can count on more sellers considering rent-to-own deals, often under the advice of seasoned Realtors. As for location, lease-to-own listings are only sporadic on the North Shore of Nassau County, but you are more likely to find them in the eastern sections of Suffolk County.

Depending on the goals of the prospective buyers and sellers, the mechanics of a rent-to-own contract can be straightforward or complex. Although these deals can be handled and executed without an attorney, you should retain one to review what you would be agreeing to. This is a type of deal with a two-part contract; there's a standard lease agreement plus an option or obligation to buy. As a prospective buyer, you will want to push for a purchase option, particularly if the economic indicators suggest that the Long Island real estate market is due for a correction.

The key components of a rent-to-own contract include a lease term, purchase price, non-refundable option fee, and a purchase allocation fund. In most cases, the tenants will be expected to pay for the closing costs. Also in most cases, you can expect that your monthly payments will be higher, particularly if you agree to the common option fees that typically go from 1% to 5% of the purchase price. If the contract gives you the option to purchase, it is called a lease-option; if it obligates you to buy, it is a lease-purchase.

Something that prospective buyers must understand about rent-to-own deals is that they often "have many moving parts," which means that they are filled with provisions and clauses that are not typically found in most real estate purchase transactions. You must fully understand how much money will be allocated towards the principal; plus, you need to be clear on all aspects of the lease portion of the agreement. There's more room for negotiation with rent-to-own contracts, so you will want to cover all bases by discussing the number of tenants, maintenance responsibilities, payment of utilities, number of pets, and other important points.

Finally, don't assume that sellers are offering a rent-to-own contract only because market conditions are favoring buyers. Some property owners offer these deals because they will be living next to you, so they want to get a feel for who will be their neighbors after the closing.