Buying a house ... Rent check by rent check

MILWAUKEE — It's a sprawling Arts and Crafts-style house, with a brand-new kitchen, a brand-new master suite and vintage details like leaded glass windows in the built-in china cabinet.

Last fall, David and Elizabeth Rubin of Milwaukee put it on the market for $475,000. Now they're asking $439,000 — a price that reflects a loss on the $100,000 they've spent on remodeling.

With no offers, they're now offering the house for sale a month at a time: If a qualified buyer is amenable, the Rubins will consider offering the house on a rent-to-own basis.

They'd rather do that than drop the price.

"It's like the stock market: You don't sell at the bottom," says Elizabeth Rubin.

As houses sit and sit and sit on the market, some fed-up sellers are turning to rent-to-own, a tactic that all but disappeared from the market when home loans were easier to get.

Also called lease-to-own, the arrangement appeals to would-be buyers who are stuck because of the same market dynamics: They want to buy, but their down payment is locked up in their own house that won't sell.

Or they lack the funds for a down payment, and the lease period gives them time to accumulate one while they live in the house they hope to buy.

While Seattle's real-estate market has remained generally strong, there are outlying areas where home sales are clearly slowing. Sellers there, who are eager to move on, may find rent-to-buy an attractive option.

However this scenario is fraught with pitfalls, say lawyers and realestate brokers. It's harder than it looks to construct a fair contract, and sellers don't always get what they want: an easy, automatic sale.

Typically, a rent-to-own agreement is two documents:

• The first is a standard lease with the usual particulars: security deposit, rent, who pays utilities, what the pet policy is, who's responsible for repairs and so forth.

• The second is the option-to-buy agreement. It lists the terms and conditions. For instance, sellers usually want a nonrefundable option fee of $1,000 or more and charge a higher-than-customary rent.

If the buyers go through with the deal, the option fee usually is applied to their down payment, as is an agreed-upon portion of the rent. Both should be held in escrow.

If they back out, they may get that portion back — or nothing at all, depending on what the two parties have agreed to.

The option-to-buy agreement also includes the home's price and a conclusion date when the buyer must purchase or the deal is voided.

Such transactions are "filled with potential problems on both sides," says Milwaukee real-estate lawyer Jeff Patterson. "There are all sorts of situations that the parties can't anticipate."

For example, the local real-estate market may rebound. Then the price, agreed upon many months earlier, may have the seller crying over lost money and the buyer dancing the I-got-a-bargain jig.

Or the opposite could happen, giving the buyer two unpleasant options: buy at a now-inflated price or walk away from the down payment they've been accumulating.

The title is held by the seller, who usually is responsible for paying taxes. The rest of the details are up for negotiation. A big one: whether the buyer can make any changes to the property, like redoing the kitchen, during the initial lease period. Cautious sellers will say no, lest the buyer backs out of the purchase leaving a substandard job behind.

Too often, sellers are relieved to get someone — anyone — into the property, says Barbara Nichols, author of "The No Lawsuit Guide to Real Estate Transactions" (McGraw Hill, 2007) and a Beverly Hills real-estate agent for two decades.

But sellers need to treat the deal as though the sale is imminent, she says. That means doing a credit check, ensuring that the buyer qualifies for a mortgage, and ordering an inspection to document the condition of the house.

What if somebody else wants to buy the house before the lease is up? "The seller is out of luck. It does tie up the seller's property," Nichols says.

If the renter decides to buy, the house still has to be appraised, financing arranged and the transaction completed.

Nasty surprises sometimes emerge, says Paul Maranan, a Milwaukee lawyer who often handles real-estate transactions. If a prospective buyer doesn't keep up with the rent payments, the seller might not be able to make the mortgage payments, and the house might teeter into foreclosure.

A long-term rental might violate the mortgage if it contains a clause requiring it to be paid when the house is sold, he said. And buyers need to make sure that owners don't run up liens against the property, such as home-equity loans.

If the renters continue to rent, the sellers might find themselves running afoul of the requirement that the house be their primary residence for two of the past five years to qualify for favorable tax benefits, says Patterson.

Of course, the whole point of rent-to-own is that it's a temporary arrangement for everyone.

Chris Muellenbach, owner of My Dwelling, a residential-leasing firm in Milwaukee, has found a niche handling rent-to-own deals eschewed by real-estate agents, who typically prefer to focus on transactions.

The sudden availability of houses for rent has been a boon to people relocating to Milwaukee who can't sell their houses or prefer to rent while they get to know the area, he says.

The Gillespie family is moving from Michigan back to the Milwaukee area and isn't having any luck selling its four-bedroom bi-level, asking $153,000, says Erin Gillespie.

"We're going to rent until the house sells," she says. "We don't even want to write a contingent offer. It's too scary."

They want to rent where they'll eventually buy so their children won't have to switch school districts.

Every rental house she has found in the suburban areas they are targeting has been a rent-to-own. But the Gillespies just want to rent.

So far, the Gillespies have looked at two rent-to-own deals offered by sellers who have already purchased their next houses.

"But it makes me nervous," Gillespie says. "What if the houses sell," forcing the Gillespies out?

A more appealing option, she says, would be for a full year's lease offered by an owner who is moving and doesn't want to put the old house up for sale until the market rebounds. That would give the Gillespies a year's respite from the pressures of the market.

"Everyone else," Gillespie says, "is, 'Please take this house off our hands.' "