Have you ever dealt with bad renters? Late payments? Stains
on the carpet? Calls late at night about a stopped toilet? Sometimes
being a Landlord is not a fun game, especially when you have
a nice home and bad tenants.
Have you taken advantage of the recent low interest rates
and refinanced your home to the maximum? What about a home equity
loan or other form of second mortgage? Do you know how much you
can walk away with from the closing table after paying all mortgage
and associated costs? Many people walk away with very little
or nothing. Some even have to pay. If this scenario applies to
you, it may make sense to delay the sale of your home. But, what
if you have to move?
Whether you are a landlord or a seller, it may be possible
to generate positive cash flow and lock in a higher selling price
with a lease/purchase (rent to own) agreement.
Here's another scenario: You want
to sell your own home, but it's not moving as fast as you would
like. You've thought about renting it to cover your mortgage
payment, but nobody wants a short-term rental with no idea when
they have to move out. So you decide to leave it vacant. You
make two, three even four mortgage payments. Your insurance company
cancels your homewoner's policy because it has been vacant for
more than 30 days (it's true, they can do it so read your policy!).
You don't want to severely discount the price, yet you need to
do something NOW! Here's a possible solution - lease with option
to buy or lease/purchase (also referred to a rent to own).
What does the rent
to own concept mean?
LEASE + PURCHASE OFFER = LEASE/PURCHASE
Just as most potential buyer/lessees don't understand the
rent to own concept, many seller/lessors don't understand it
either. While a rent to own real estate deal is nothing more
than a lease that contains a purchase option, the traps are in
the details. Before you attempt, or even consider, a rent to
own deal, get educated. The following 10 tips, actually ten points
to consider, just scratch the surface.
- Make sure you have the proper mind set. You will be a landlord,
not a seller for the length of the contract. You should not have
any emotional attachment to your house. Notice, I said house,
- Be prepared to be a landlord for the foreseeable future.
Over 75% of buyer/lessees never exercise their purchase option.
The reason(s) they are unable to buy a home today are the same
reason(s) they will be unable to buy a home tomorrow.
- Evaluate your potential buyer/lessee properly. This is probably
the most important point. If you give the wrong person the keys
to your house, you will have a disaster. You cannot allow yourself
be emotional. Do not allow yourself to feel sorry for the other
person's problems. Do a proper credit check, reference check,
and visit the candidate in his/her present home so you can see
what your house may look like in the future. Find out why they
are unable to do a conventional real estate deal today. What
makes you believe they will be able to do a conventional deal
- If the buyer/lessee is considered too big a risk by a traditional
lending institution, why should you take a chance? Answer - reward
or potential reward. Don't be shy about setting the option price
higher than market value. Make sure your buyer/lessee understands
the reason for your price. If they can't accept this, let them
- The purchase option is set for a specific time period. Negotiate
for a short time period, say one year. Hopefully the purchase
option will be exercised, and the deal will be completed. If
not, you will be able to either tell the tenant to move out,
or you can negotiate a new deal. At this time, the tenant's option
consideration and rent credits will have been forfeited. This
is your leverage.
- Be fair. If your tenant has been good, you should want to
keep him/her. It's not easy to get a good tenant. Roll the original
option consideration and rent credits into the new deal. However,
you should also increase the new option price to account for
market appreciation. You should also adjust the new monthly rent
amount to absorb any increases you incurred, taxes, insurance,
- If your tenant has been less than desirable, get rid of him/her.
Don't let the fear of having an empty house influence your thinking.
An empty house is the better alternative.
- Be creative. Most people who want a rent to own home say
they are tired of throwing their money away. Understandably,
they want some perceived equity in return for their monthly payments.
Offer them a higher percentage of rent credits in return for
a higher monthly rent amount. For example, assume you have an
agreement that says you will apply $400 of a $1,200 rental amount
to the rent credit pool. That's 33 percent. If the lessee is
willing to increase the monthly rental amount to $1,500, you
should offer to apply $750, or 50 percent, toward rent credits.
The additional cash flow of $300 is yours today in exchange for,
in essence, a $4,200 decrease in sale price on a deal that has
under a 25 percent chance of happening within the next twelve
- Be vigilant. Visit your tenant in their home (your house)
on a regular basis. Make sure they are performing their contractual
obligations. Remember, they agreed, or should have agreed, to
a list of maintenance obligations. Don't allow anyone to deteriorate
the value of your investment property.
- Meet your contractual obligations. It's all about being fair.
At some time in your life, you have rented a house or apartment,
so you are familiar with a lease agreement. If you have ever
bought or sold a home, you are familiar with a purchase offer.
The lease/purchase agreement is a hybrid of the two - a lease
agreement combined with a purchase offer (called an option, or
that is, the right to buy the home at an agreed upon price within
an agreed upon period of time).
Here's an example of how rent to own works. Let's say you
have a house worth $100,000. The "going rent" in your
market for that house may be about $800 per month. A rent to
own agreement would read essentially as follows:
|Lease Term: Two Years
||Monthly Rent: $800
|Purchase Price: $100,000
||Rent Credit: $400/month
Usually, part of the monthly on time rent payment will be
credited towards the price of the house. In the above example,
50% or $400 per month is being credited. So if the tenant decides
to buy after one year (lawyers call this "exercising their
option to buy"), they would pay $100,000 - $4,800 = $95,200.
If the tenant/buyer does not purchase the property, the owner
would keep all of the monthly rent. The best part is, the $400/month
is considered "option consideration" by the IRS and
does not have to be reported as income until the house is sold
or the lease/purchase agreement expires!