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October 17, 2017:  
 

Sell Your Home: Rent to Own Approach

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.

Home Wanted ListingsHere'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 AGREEMENT

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.

  1. 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, not home.
  2. 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.
  3. 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 tomorrow?
  4. 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 walk away.
  5. 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.
  6. 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, etc.
  7. 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.
  8. 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 months.
  9. 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.
  10. 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!

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