From Renter to Owner: Finding the Road and Avoiding the Bumps Along the Way.

I. Introduction

Home ownership is not for everyone. It has benefits, and it has drawbacks. For most people, the benefits outweigh the disadvantages. But knowing what those pluses and minuses are is important in making a decision which will affect the unfolding of your life.

A. Advantages of Rental Housing

If you do not own a home, you likely live in rental housing. The advantage to rental housing is that your monthly payment is usually cheaper than a mortgage. Other than a negotiable security deposit, your down payment on the place is likely small. Your commitment to the landlord is short term, usually a year, but sometimes you can even be month to month, giving you mobility in case your job requires you to relocate. If you get tired of the place, you can just pick up and move somewhere else when your legal obligation ends. Maintenance and repair costs are covered by the owner of the property.

B. Advantages of Home Ownership

Home ownership has its advantages as well. As you pay your home mortgage, you build equity in the home. You do not get your rental payments back when you leave an apartment, but with an increase in your home's equity over a few years, you can realize a profit on the sale which can be rolled into a nicer home. A history of making timely mortgage payments will give you a higher credit rating. Further, rental payments typically increase each year. You may start out at $800.00 per month. But if you stay in the same place for ten years, your rent may eventually be $1,500.00 a month. After ten years of owning a home, your mortgage payment will still be the same $1,000.00 you committed to all that time ago.

The portion of your mortgage payment which goes towards paying interest is tax deductible. In the early years of the mortgage, having an extra $12,000.00 to write off of your taxes can come in very handy around the middle of April, and it can mean a fat return.

Any home improvement work you do remains yours. If install a much needed dishwasher in the kitchen of your apartment (and believe me, this can save your marriage), the landlord will keep that when you move out, as it is a fixture. But if you install it at your home, this will improve its value to buyers. So the handy do it yourselfer can realize significant gains upon sale for his/her hard work in making home improvements.

The tricky bit is how do you get from here to there. It is not as hard as you might think. Further, knowing what makes it difficult can steer you around much of the trouble you will find along the way. So let's get started.

A. Get Right With Your Landlord

If you are currently renting your living space, you may need to alter your arrangement with your landlord. There are many tenants who hold the unfortunate belief that the purchase of a home lets you out of your lease agreement. I am a lawyer licensed to practice in the state of Ohio. I cannot speak for other states, but under Ohio law, there is no "get out of your lease free" card simply because you closed on a house and now you cannot afford to make two monthly payments for your residence.

1. Anatomy of a Disaster

Here is how the disaster unfolds for someone falling into this trap. Joe signs a one year lease in Columbus, Ohio on February 1. Two months into the lease, he spies a house on the market that he really wants to buy. He has a bonus from work with which he can make the down payment. He talks with the realtor, puts in an offer and it is accepted. Joe closes on his house at the end of April.

Joe writes his landlord a letter, saying that he wants out of this lease. The landlord has no interest in Joe running out on his rent, and has no tenant ready to step into Joe's shoes. He tells Joe that though he will try to find a replacement tenant, he expects the rent to be paid through the end of the lease.

Joe figures what the hell, and stops paying his rent. He cannot afford to pay his $1,000.00 per month mortgage and also pay is $800.00 per month rent. And besides, he has already closed on his home, so who cares if the landlord puts something on his credit report?

What Joe does not realize is that $800.00 per month for ten months equal $8,000.00, and that it is worth the time and expense to bring a lawsuit over such an amount, especially when Joe does not have a defense to the lawsuit. The landlord calls his buddy who is a lawyer downtown and they put together the suit and file it in June. The suit includes a bunch of bogus damages that the landlord claims Joe did but were really for nothing more than the normal costs of getting the place ready for the next tenant.

Joe ignores the suit (he does not have a defense to it anyway and he cannot afford to plunk down $2,500.00 for an attorney). In July, the landlord moves for default judgment, and in August, the Court grants the motion, giving the landlord a Judgment Entry specifying damages in the amount of $10,000.00.

The landlord then pays the court a filing fee and certifies the judgment. This has the effect of putting lien upon the property. Joe's mortgage contract has a clause in it that he will not allow any creditor to put a lien upon the property without the mortgage company's consent. They send Joe a letter telling him that he is in breach of his contract with them and that he has to remove the lien from the place.

In the meantime, the landlord's attorney does a property search on Joe on the county recorder's website and finds that Joe owns a home in the county. The attorney starts foreclosure proceedings by filing a lawsuit to force the sale of the place at Sheriff's auction. Now when Joe goes to an attorney to fight this, the attorney wants $4,500.00 and says that more will likely be necessary as the case unfolds. Joe does not have even $2,500.00.

At this point, Joe has two options. First, he can declare bankruptcy, and his home and assets will be sold to pay his creditors as much as can be legally wrung from him. If he does not do this, the home will eventually be sold at Sheriff's auction and Joe will be out on his ass. Since auction prices generally are less than what the home is sold for in a consensual sale, Joe may not even get what he paid for the house. This means that he may still owe the mortgage company money, in addition to the landlord.

Now when Joe tries to rent an apartment, the new landlord will look at his credit history and see a disaster rather than a prospective tenant. Joe may be sleeping in his car until he can find a landlord so sick of unrented property that he will take a chance on Joe.

2. Avoiding Joe's Disaster

How can all of this be avoided? The answer is timing. Joe should have waited for the next ten months until his lease was about to run out. At that point, he could go to the landlord to sign a new lease, but this time, he could specify that the lease should be written in a way that it is a month to month obligation. In Ohio, Ohio Revised Code Section 5321.17 mandates that month to month tenancies can be terminated by either the landlord or the tenant for any reason or no reason at all by giving 30 days notice from the start of the next rental period.

All during this time that he is waiting for his lease term to expire, Joe could be acting like he was paying a $1,000.00 per month mortgage and banking the extra $200.00 to help with his down payment. Joe's lease expires and he goes month to month, or perhaps he signs another one year lease agreement with an early termination provision. Now when Joe finds the home he wants to buy, he can put in his offer and give his notice to the landlord when the offer is accepted. Joe can negotiate a closing date on the home which will match his leaving the apartment. When Joe does leave the rented property, he videotapes its condition in case the landlord decides to make up a bunch of bogus damages. Now Joe is well on the road to long term home ownership.