McKees Rocks couple learn pros and cons of leasing to own
Matthew and Christine Heckter are seen here with their daughter, Annie Marie, at their home in McKees Rocks. The Heckters are concerned about how they will meet the terms of a lease-to-own contract on their home.
Matthew Heckter stands in front of his family home. He works as a night stocker at Giant Eagle to provide for his wife and daughter, with another baby on the way.
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As Matthew and Christine Heckter sit in their living room wondering how they will meet the terms of the lease-to-own contract on their McKees Rocks home, they swing from fear to hope and back.
The couple signed a contract in August to buy the three-bedroom home and a detached two-bedroom rental house on the same property for $31,000. What they say they didn't understand at the time was that they would have to make a $16,000 balloon payment on Aug. 1, 2013.
With no credit history, no disposable income, a 1-year-old daughter and another child on the way, Matthew, 22, and his wife, Christine, 21, are beginning to feel they've gotten in over their heads.
"In another two years, if we don't have $16,000, we are going to lose everything we've put into the house so far," said Mrs. Heckter, who is unable to work because of a blood clot that has made her pregnancy high-risk.
Mr. Heckter works as a night stocker at Giant Eagle in Kennedy bringing home about $380 a week as long as he works at least 32 hours. But there's the chance that his hours could be cut to as low as 24 hours a week if business is slow.
Like many aspiring homebuyers who have no money for a down payment or a credit score that is not high enough to get a bank mortgage, the Heckters entered a contract with a home seller to buy the property after building up some equity through rent payments.
Leasing to own, also known as rent to own, is in essence the layaway of real estate.
But unlike setting aside clothing or other consumer items at a store until the bill is paid in full, leasing real estate to own comes with a number of practical and legal challenges.
"From a legal perspective, the rent-to-own situation can lead to unusual situations not found in your normal purchase and sale," said Robert Foley, a former real estate lawyer and owner of Flat Fee Real Estate in Burlington, Vt.
For instance, he said if the buyer and seller in a non-lease to own situation disagree, the two parties can simply part ways. But in a lease-to-own contract, it's not so simple. Mr. Foley said the seller would have to begin an eviction to terminate the relationship.
While there are pitfalls in leasing to own, there are benefits as well.
"This type of situation is particularly beneficial where the seller has already moved," Mr. Foley said. "[The seller] gets a party to occupy the property and cover the carrying costs while knowing they will eventually be selling the property to their tenant."
While data on the number of lease-to-own sales that have occurred in recent years is not available, real estate industry professionals say more buyers and sellers have turned to this option due to the tightening of mortgage loans standards and the increasing number of buyers with damaged credit and little saved for a down payment.
Bill Golden, an Atlanta-based real estate agent with ReMax, said a lease-to-own purchase is most ideal for buyers who need time for some reason, such as those who are selling another house or waiting for an anticipated influx of cash.
Another factor to consider, he said, is which way is the market trending.
"If prices in the area are decreasing, it may be advantageous for a seller to agree to a sale at today's prices, but a disadvantage for the buyer," Mr. Golden said. "If the prices are increasing, it would be the opposite."
The Heckters' lease-to-own agreement requires the couple to pay $600 a month, in weekly payments of $150, until July 31, 2013. They're also responsible for paying $132 a month in property taxes and making any repairs and improvements during the lease-to-own period.
The sellers maintain a homeowners insurance policy on the house and have required the Heckters to maintain renter's insurance costing $70 a year.
Initially the Heckters thought they could pay the entire purchase price in monthly installments of $600. They also thought they would get credit for the $300-a-month rent a tenant is paying to live in the separate rental house on the property. They later discovered they have no claim on that income until after they pay the full $31,000 purchase price.
"This keeps me up at night," Mr. Heckter said. "I think about it all the time. I don't know where I'm going to manage after these two years to get that $16,000."
Balloon payments are common in lease-to-own deals. The term describes a large lump sum payment due at the end of a series of small payments. The real estate closing does not occur unless the buyer makes the balloon payment.
Allegheny County appraiser records list the Heckter's property's land and building value at $37,200.
The property owner, Jean Morton, declined to comment for this story.
Unlike typical rent-to-own deals, the one the Heckters signed did not require any security deposit or non-refundable hand money. The seller also charged no interest.
"They are lucky they didn't put a lot into it when they moved in. A lot of people put down 5 percent," said Rhonda Duffy, president of Duffy Realty in Atlanta.
"Buying a home is the American dream. But often the 'buyers' in these situations get ahead of themselves," said Ms. Duffy. "Unless you know you can own the house in three years or less, you are foolish to put money into it. You are really just paying rent."
At a rate of about $750 a month, the Heckters have put about $5,250 into the deal so far. They have not had any major maintenance repairs or other house expenses so far. They have no savings for a home repair emergency if one occurs.
As the couple discussed their anxiety about the future, they recalled how much simpler life was when they were renting a $400-a-month apartment nearby.
Back then, they could afford to go out for the occasional dinner. The last time they went out was to Red Lobster on Valentine's Day 2011.
"We can't afford to do that anymore," Mr. Heckter said.
Their disposable income is so low they wonder what bank will give them a loan, especially since they've never established credit -- not even for a car loan.
After all their fixed expenses, the Heckters are left with about $50 a week in disposable income. Their food stamp benefits recently were cut to $200 a month, which buys enough to last about two weeks.
"We live like we're older people," Mrs. Heckter said. "There's so much financial stress on us and there's no free money. What can we do with $50 after buying Anna's diapers, which is $20, and wipes and whatever she needs?"
Before Mrs. Heckter got pregnant with her first child, she was working at Dollar General in Kennedy. She started working when she was 14 at McDonald's and has had a job ever since then.
She quit working when she found out she was pregnant with Anna because it deemed a high-risk pregnancy.
Pregnant again, this time she faces even more risk. She must take blood thinners every 12 hours for a blood clot or her condition could be fatal.
Even as they face worries about Mrs. Heckter's health and that of the baby on the way, the thought of losing their home tears at their insides and keeps them up at night.
For now, they are just taking things one day at a time.
"My biggest fear is not being able to pay that $16,000 at the end of two years and then they take our home off of us," Mr. Heckter said.
First Published February 24, 2012 12:00 am