Keys Now, Sale Later

With Credit Tight, Buyers, Sellers Rediscover Renting to Own

Justin Sprinzen took a chance on an abandoned Capitol Hill townhouse last spring, despite the faltering housing market.

The 34-year-old novice developer saw potential profit in the vacant District-owned property on D Street NE, about a dozen blocks from his home.

So he bought it from the District in March and went to work gutting and refurbishing. He knocked down walls; added bamboo floors, modern lighting and new appliances; and installed a small backyard patio. He put the property up for sale on July 4.

It went nowhere.

At least two serious buyers were not able to get financing, Sprinzen said. After four months, with the economy getting worse, there were still no viable takers. So he began searching for alternative ways to sell.

The house was advertised on Craigslist with the headline: "Rent/Lease/Option to Buy." Sprinzen said he will consider tenants who are committed to buying the house but cannot buy just now for whatever reason -- shaky economy, bad credit, not enough for a down payment, no longer able to qualify for a mortgage. These arrangements are often known as rent-to-own.

"The name of the game is to stay above water," Sprinzen said. "If I can break even and cover my mortgage and get through this, I am open to it."

Renting to own, also known as renting with an option to buy or a lease-purchase agreement, had practically vanished during the days of easy money. Now real estate professionals say the practice is reappearing as sellers grow increasingly desperate and buyers with damaged credit scores find it harder to secure mortgages.

Glenn Kelman, chief executive of the Seattle-based online brokerage firm Redfin, said he has seen a spike in requests from buyers looking for listings with rent-to-own arrangements. He said his agents are telling him that homeowners are also increasingly willing to consider such requests.

"Normally, sellers will tell you to pound sand if you ask them for an option to rent," Kelman said. "But now because the sellers are in a vulnerable position, they are more likely to do it."

However, several real estate professionals said they remain skeptical of the practice. A volatile market could lead a buyer to lock in a price that is higher than what the property will be worth at the end of the term. That can be bad for both seller and buyer if a bank is unwilling to make a loan. In a world of falling real estate values, the homeowner can be foreclosed on, leaving a potential buyer high and dry. And if a potential buyer cannot secure a mortgage now, then there is no guarantee that he or she will be able to do so in the future.

"There is substantial risk for buyer and seller that the other won't be able to perform given the volatility of the real estate market," said Mark E. Simon, a real estate lawyer with Village Settlements in Montgomery County. "Each side should look at each partner carefully on this."