The rent to own option…
From the viewpoint of a renter, rent to own homes (also known as lease to own homes) are a great deal. But in the eyes of most property investors, they represent a last resort. This is simply because any investor looking to sell their property naturally wants to get out as quickly as possible, so they can use the funds for something else – be that I was unsuccessful at it personal or for further property reinvestment. Rent to own is just a stop-gap for any property investor. It ensures that the property won’t be sold until the purchase option is actualized – at some point in the future (if at all).
Learn by example…
Property investors who have been unsuccessful at selling their property at a given price may elect to offer their building in a rent to own scenario rather than continuing to lower their asking price. I once had a single family rental that I was unsuccessful at unloading, even with several price drops. My existing tenant asked me if I would extend a rent to own agreement to him, so that he might be able to purchase the property at some point down the road.
I reluctantly said yes, because the prospect of a sale was better than no sale. This is human nature. And rent to own offers property investors that ray of hope that they will, some day, be able to sell off their property (usually, as was my case, in a down market). So my tenant and I negotiated the many terms required in any rent to own contract. And there can be quite a few terms to consider – it’s a good idea to get a feel from the tenant what their needs are first though.
An overall positive experience
My experience with my tenant and our lease to own agreement was positive, though it did not yield a sale, I’m sorry to say. At the end of the one year lease term we had negotiated, my tenant was unable to qualify for a conventional loan, and so could not move forward with the transaction. He had been paying about fifteen percent overage in market rent, and I was able to retain this fully, which helped my overall cash flow on the property. And since he was a holdover tenant, there was no vacancy down time for the building. This was a major plus.
In addition, I had negotiated the term of the rent to own as only one year, which was for myself, the maximum time I wanted to keep the property off the market, prior to trying to re-market it. I was eventually able to sell the property, along with the property I owned next door to it, a three family house, both together as a package deal to another property investor. The packaging of the two properties made the single family house acquisition much more attractive to other property investing bidders at the time.
How does rent to own work?
Most lease purchase homes agreements have a base rent with some additional “overage rent” added on. For example, if market rent is $1,000 per month, the rent for a lease option might be negotiated at $1,200 per month, with the extra $200 per month going towards the down payment from the tenant when they are able to actually close on the house. In the interim, you, as the landlord, are collecting $200 per month more each month. In cased the tenant is unable to exercise his option to purchase, you get to keep that monthly overage. In essence, that overage is the tenant’s cost to purchase the option to buy the property.
Security as down payments
In addition, some lease to own arrangements call for a down payment on the house. In my case, we made the standard security deposit the down payment. That is, if the tenant closed on the house, their security deposit would be returned in the form of an additional deposit at closing. Naturally, any rent to own contract will stipulate the purchase price agreed to by both parties, as well as the length of the lease prior to the tenant exercising the option to close on the house. Usually, this can be anywhere from one to five years.
Some rent to own contracts are merely purchase options. Namely, the tenant is only buying the option to purchase at some point in the future. In this case, no purchase price is agreed to at inception. Rather, the tenant is buying the privilege of a right of first refusal to buy the property at some designated time period in the future. At that time, the seller landlord can set the price he will place the building on the market for, and the tenant has the option to negotiate first with the seller. If they cannot agree, the seller can then place the property on the open market for sale.
Rent to own as safety net
Property investors who are in difficult financial positions find rent to own a viable option for short term cash flow. Whether you are offering your rent to own homes in NY or rent to own homes in CT…wherever you offer them, you can increase your monthly income by allowing for over-market rent collection. Rent to own allows you to pay your mortgage and other bills while a tenant remains installed in the building…thus helping to protect your asset, as opposed to having a vacancy while trying to market the house for sale. On the down side, property investors should realize that tenants interested in a lease to own contract may have poor credit, and may not qualify for a conventional loan. Otherwise, they would be searching for a straight home purchase directly. So as a property investor, it helps to do a rent to own contract with a current tenant, who you know pays his rent in a timely manner, and has a good track record with you.
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