Keys Now, Sale Later

Sprinzen said that despite the risks, he would prefer to strike a rent-to-own deal with a potential buyer rather than just rent out the property. Allowing somebody the ability to own gives him a sense of pride, he said, and homeownership is an instrumental part of the urban revitalization of the District, which Sprinzen said he feels a part of.

"I am covering my mortgage at the same time they are gaining some equity . . . so I feel it is kind of a win-win for everybody."

And, he said, "It helps stabilize an area that could have taken more of a bath than it did."

Typically, a rent-to-own agreement is a contract between owner and tenant that gives the tenant the option to buy the home at the end of a stated period of time. A nonrefundable deposit is sometimes asked for by the seller to ensure commitment on the part of the tenant. The monthly rent a tenant will pay is typically higher than the prevailing market rent for similar properties, as the tenant is also paying for the right to purchase the home. This premium can be used as a credit toward the purchase, potentially making it easier to get a mortgage.

Because rent-to-own deals are a hybrid of renting and selling, they can be difficult, said Steve Wydler, a lawyer and real estate agent who is co-principal of the Wydler Brothers team at Long & Foster.

"In my experience, I have had a number of people who have tried to put together rent-to-own deals and not once have we been able to close," he said. "When you try and do a rent-to-own, you have the complexity of combining the two."

Striking an initial rent-to-own deal is the start of a long-term relationship. And with time, hearts can change.

A buyer could discover down sides to the property, such as: "I didn't realize the traffic noise was so bad or the commute was so bad or the house was built so poorly," Wydler said. "There are all sorts of things that can come up once you are living in a home."

Thus, many important things should be worked out upfront. The option value, how much time a buyer has to exercise that option, the terms of the rental agreement, who will pay for major repairs and the purchase price -- or at least a method of determining the purchase price when it comes time to sell -- should all be determined before a deal is signed, with both sides represented by legal counsel, real estate experts said.

Simon, of Village Settlements, said an escrow company should be used to hold the portion of the monthly payments that will ultimately go toward a down payment. Simon also said a potential buyer should hire a title company to research the property and find out how much the owner owes and whether the property is worth as much as the mortgage on it. If a seller's loan is underwater, then the bank would probably have to approve a short sale, he said, complicating any transaction.

Once a deal is struck, a lawyer can record a memorandum of option, a public document that gives notice that someone has entered into a contractual obligation to buy the property in the future, Simon said. This can prevent a buyer from taking additional mortgages out against the property, Simon said, but none of these steps is foolproof.

"You can protect yourself some, but not completely, in a long-term relationship," Simon said. "From start to finish, the longer there is, the more chance there is for bad things to happen, and especially with the economic climate that we are in right now -- with recession, job losses and falling home prices -- it is a perfect storm for things to go wrong."