NYC Real Estate Survival: Does Rent-to-Own Make Sense in New York?

Test driving isn't just for cars. Occasionally, condos and even co-ops come with a rent-to-own option, in which some or all of your rent over a certain period of time (commonly 6-12 months) is applied toward a pre-determined purchase price.

Whether these arrangements make sense for buyers is a matter of debate, and circumstance.

"It's an interesting option for buyers in markets where it is cheaper to own than to rent," says Noah Rosenblatt, the founder of the Manhattan real estate analytics firm "Manhattan and, I would expect, Brooklyn, are two markets that do not fit into this class."

On the other hand, if you believe real estate prices have bottomed out, rent-to-own allows you to lock in tomorrow's gain at today's price.

"It's very specific to an individual buyer's needs, wants, and financial situation," says Rosenblatt. "A buyer with a stable job in a rising wage environment who is 1-2 years away from being able to comfortable afford to purchase might find this a very attractive option."

If you need to build up your credit history to bolster your mortgage application, rent-to-own can help. In newer condo developments, which can suffer from crippling construction defects, it's also a good way to kick the tires on the quality of construction.

Here are some things to keep in mind if you have the option of test-driving your next place:

• Rents are often higher than market to compensate for the "luxury" of having the option to buy.

• If you're planning to get a mortgage, you will only be allowed to apply the portion of the rent that is above market-rate rent (as determined by an appraisal) toward the down payment, says Manhattan real estate lawyer Jerome Strelov. The remainder of the rent can be applied to closing costs and the purchase price.

• Rent-to-own options are usually offered on a property that's taking too long to sell and/or by developers anxious to move lots of condos. A wallflower apartment (or building) might be overpriced or undesirable in some other way, so due diligence is key.

• Get a lawyer to make sure that you have a valid, binding contract to purchase and to negotiate fair terms. Also, advises Manhattan real estate attorney Jeffrey Reich, "Consider negotiating the right to have the contract recorded, if it's a condo, or to file a UCC financing statement, in the case of a co-op, so the owner doesn't sell the apartment out from under you."

• Most lenders will let you apply rent toward the purchase price or closing costs, but not the down payment.

• Terms vary greatly. Be wary of contracts that obligate you to buy. You may also find that you, rather than your landlord, are obligated to pay for repairs and upkeep.

• Rent-to-own options are more common in condos than co-ops, but if you're considering a co-op, get the approval of the board, so you don't find your application rejected after a year of rent payments.

All that said, rent-to-own apartments are fairly scarce in NYC at the moment.

"I haven't been involved in one in a couple of years," says Melissa Cohn, the president of Manhattan Mortgage, one the city's biggest mortgage brokers. She attributes some of that to the fact that "getting rent to qualify as part of the down payment is so difficult to do."

A recent search of (go to 'Advanced Search,' choose 'Description includes' and type 'rent-to-own') turned up two uptown condos advertising rent-to-own options, while a search of real estate listings produced four, including two at notoriously troubled downtown condo buildings.