Thanks, Red, I appreciate it! Hmmm, prices have been falling for about two years now, would you say? So maybe if this downturn is like the other, prices will keep declining for another year, perhaps?

Janis:
Prices dropped rapidly in the first couple years, then dribbled up and down. Maybe 3 years of quick drop, then 4 years of bouncing along. Roughly...

Heres a link:
http://www2.standardandpoors.c...

Note that from 90 to 96, 30 year interest rates were dropping from highs of over 10% to lows in the 7% range, and the peak overprice was much less; so... things ARE different this time.

Hahahaha Red, thanks so much! I googled and found more than 100 acronyms for RBA, none of which seemed to apply, so I appreciate it.

Also, thanks for the info on how long the last slump lasted. But, did prices actually decline for five years, or did they fall and then stay low for that period?

RBA means Real Bay Area. San Jose used to be in the Real Bay Area, but was removed when home prices dropped. Home prices never drop in the REAL Bay Area; thats because the RBA is different.
;>)

JohnnyComeLately is right, with no price negotiated in advance, what you are paying is just rent. A pre-negotiated price is an Option, and options cost money. Note that when prices are declining, options expire unused and are a 100% loss. This Rent to own strategy is for when prices are declining, like now. The big kicker is the right of first refusal; if you really want the place, you can have it for what someone else is willing to pay. With you living in it, that tends to be quite a bit less than it might otherwise be. So you pay less than owning it would cost, until the owner gets real on the price. Last time around, prices declined from 1991 to about 96, then went up very slowly to about mid 1998 (SF Case-Shiller data).
So in this rent to own scenario, you have maybe 5 or 6 years to finish saving your 20% down payment.
What if it gets foreclosed? Well, that will drop the price right quickly, won't it? And think how happy the bank would be to have an offer from the tenants, who they would thereby not have to evict.

Hey there, JohnnyComeLately! Haven't seen from you before - glad you chimed in! I don't know what the RBA is. If you can clue me in on that, I can probably tell you whether or not San Jose is in it.

Tough to beat renting here in the RBA (is San Jose in the RBA ?)

www.burbed.com/2008/07/13/san-...

IMHO, RTO works only with an agreed upon process for setting the price at sale time, otherwise
its just rent.

Aiee! Hadn't thought of that! Along with abandoned pets, the real victims of the foreclosure mess are renters, don't you think? I mean, you can blame a homebuyer for not doing his or her homework, but nobody expects renters to check the financials of their landlords!

Surely the flaw in a rent to own scheme is that the owner simply throws in the towel, stops paying the mortgage and either walks away or gets foreclosed on?

Oh, I see - it's not really a big deal to make such an arrangement. Sounds like a great way to make the plummeting prices work for you!

My friends were doing it around 1993-96, there were lots of new, high end homes that couldn't be sold for what the owners owed.
Let me give you a current example: Santa Cruz, New, $1.2 Million home, 2800 sq ft on 7000 sq ft lot, 4 blocks from the beach, 2 blocks from the Yacht harbor back entrance. I looked at it, really liked it, but $1.2M is too much. After 6 months, they put it up for rental on Craigslist for $4500 a month last October. I figure that they are eating about $4000 a month.
In this case, you wouldn't even have had to make the rental offer, the owner did that for you. Getting the "right of refusal" agreement is easy, doesn't cost the owner anything, gives them an instant "second bidder".
The reason this works: it takes years for folks to realize that Real Estate does NOT always go up. They will bleed money for years rather than take a loss from what they, at one time, thought the home was worth. ( For the unfortunate that bought near the peak, they have no choice; the amount of money that would have to be brought to the closing is too much to raise, but they can afford to bleed a bit for years while waiting for the value to return.) Giving them hope of a Sale makes them happy, while you wait for the dismal bottom to finally be obvious: buying really would cost you close to renting, and prices are stable.

Oh! David, I see your point. That hadn't occurred to me. Although technically my friend does rent out a single-family dwelling, it is a tiny, though detached, unit, basically two rooms with a teeny-tiny kitchen with barely enough room to turn around in, so, really, equivalent to an apartment.

Red, BINGO! That's exactly how I feel about it. I do not see any sense in, say, buying a Pittsburg foreclosure, regardless of how cheap. In some 'hoods there, the entire block is foreclosed homes. Who wants to live there? Would you be able to get a respectable, bill-paying tenant? I can't believe you could!

That rent to own idea makes a lot of sense, Red. But would a landlord actually go for it these days? Your friends who pulled it off, when was that? I'd worry about the landlord honoring the agreement, for one thing. But it sounds like your friends succeeded.

Oops, sorry, calculator hiccup ($7200 is in error): a 30 year amortized jumbo at 7.5% on $950000 gets you a $6642 monthly payment (bankrate.com) plus roughly $1000 month in property taxes, a $7640 monthly nut.

I thought back a bit, and the right strategy is actually rent to own. I knew a number of smart folks that did it the last time around...
Here's how it works: look around for a place you would want to own, but it is empty and has been on the market awhile. Make an offer to rent, with a portion of the rent going to the purchase, price to be negotiated later. The home remains for sale, but you get right of first refusal; ie, if an offer comes in, you get the home if you want it for the same price. In the meantime, the owner has income and a very high class renter, and the potential for a sale.
Take for example that home on Canyon Road, in the Emerald Hills Post; there are two rentals on Canyon Road for 3Br/2Ba, the most expensive being $3200. (The most expensive rental I could find in the area was $5000 for a 3500 sq ft 4 Br/3 Bath) Buying the Canyon Road home recently would have cost you maybe $200k down and $7200 a month; you would have lost $50000 in value, yet it seems you could have rented the equivalent home for a year for less than just the most recent price reduction.

There were times when this made sense, when we hit the bottom it will probably make sense again.
Right now, probably a really bad idea; the only areas that are near the bottom now would be those with massive foreclosures: low end homes, or the inland areas that are just too far away. You could pick up a foreclosure there and appear to have decent cash flow, but it would be in a deteriorating neighborhood and result in lousy tenants and frequent turnover. Then, would you want to live there?
Most homes you would really want to live in, have not fallen much in value. Thus, buying now will get you a place that is bleeding money and could drop in value, and could get wrecked by the renters. What kind of sense does that make?
Oh, and are you going to lie to the lenders about living in the place for a lower interest rate? They are somewhat cautious about investor purchases these days...

People move in and out fast? In a SFR? For apartments, I'd agree. For SFR, well, I rented one for 6 years (my rent going up a total of $46/month during the entire 6 years). My neighbor had been living in her rental for, oh, 60 years or so it seemed by 1) how old she was and 2) that she was paying about $450/month in rent for a house in Berkeley.

Sure, you can take your chance. Just don't be surprised, ESPECIALLY if you're renting out a nice single family house in a nice location, that your renters just might stick around for awhile, especially with rent control. If you have a portfolio of rental properties, an apartment building or whatnot, it'll average out, but when you're taking a chance on a single unit...you're speculating on someone's behavior. I don't care to speculate on that; rather I'd run the numbers assuming the worst so I'm not "surprised." I highly recommend others do that also. If you don't, you might do fine...or it might ruin you financially. Adjust your gamble accordingly.