Rent to Own Contract

[sweettractors]

I have a few single family rental homes, and was considering the "Rent To Own" method of selling some of the units. Any input or first hand experience? Interest rates, terms, down payments, etc. I can see potential problems with keeping physical damage insurance on the house until it is paid off. A sample contract that you may have used in the past would helpful--Ken Sweet

 

[aardvark]

I'm *sort of* going through this same thing right now. I have a house in Atlanta which I lived in before moving to Florida, which I have been renting until recently. I've decided to sell it and have some interste in the rent to own area. I was advised to stipulate in the contract that the down payment at the time of signing the rental lease is non refundable. This is about as much as I know at this point, I'm letting a lawyer take care of all the contract details. A real estate lawyer is whole lot cheaper than a real estate agent, and the contract they write is more accurate and probably more binding, if that makes sense. Anyway, not to hijack your thread, I'm hoping to hear some good advice also.

 

[Junkman]

I only know of one person that went this route. The buyer defaulted shortly after the contract was signed, but wouldn't leave. Then came the eviction notice, and the court battle ensued. The homeowner to be claimed that he couldn't be evicted because he was the "owner", and the seller claimed that he was just a tenant. By the time the courts finally sorted out the whole mess, it was over a year later, the home was trashed, and the lawyer got paid a lot of money. After seeing what this person went through, I would say that a real estate broker and a real estate lawyer are both less expensive than a default. Sell the home outright and let the bank have the problems if the buyer defaults. That is why you are in the tractor business, not the banking business. Do what you know best and leave the banking to those that do there thing best..... giving mortgages, qualifying the prospective buyer is the real estate agents job, and making sure that you are properly protected in the sale is the job of the real estate lawyer. /forums/images/graemlins/grin.gif /forums/images/graemlins/grin.gif

 

[chucko]

The way "I" look at it is there are MANY banks and other that loan money. With all of them out there if someone can't get a loan why would I risk loaning to them (that is what you are doing is loaning to them) . I take paments for stuff I sale....!st payment is the saleing price and the rest they can pay whatever they want. Would you rent to own a tractor? Not does Kubota but you yourself? If the answer is no then ask yourself why it is and why it would be no on something as small priced as a tractor compared to a house

 

[OkeeDon]

Not sure how the "rent to own" concept works, but I've seen several people sell a rent/option to purchase to tenants. The idea is that the tenant gets to lock in the purchase price for a future purchase. They pay an option fee, which the landlord keeps if the option is never exercised. Then, they pay rent at a slightly higher premium than normal. The agreement is that a certain amount of the rent will be credited to a down payment if the option to purchase is exercised. If the tenant never exercises the option, the landlord also gets to keep the increased rent. Usually, the tenant treats the house with more respect, because they're building up a potential stake in the property. However, legally they're still tenants and there is no problem evicting them if they fail to pay.

This is a great concept for the seller if prices are stable, and allows the buyer to build up some pre-equity. If prices are rapidly increasing, it makes little sense for the seller to lock in a price now. An acquaintance of mine sold a rental option on some commercial property near mine about two years ago, for example, and when the tenant exercised the option a few weeks ago, they turned around and sold the property for twice what they paid for it the day before. The seller was sick over it; his option price was nowhere near the amount of increase.

 

[MarkLeininger]

I've been on both sides. I purchased a house this way and the owner gave me an interest rate between the current mortgage rates and the highest CD return. It was a good deal for both of us. I paid escrow and the owner handled insurance and taxes.

I also had a rent to own agreement with a tenant in a building I owned. I charged them a month premium for the option of buying the place, with all rent payments being applied to the principal if they purchased. I did not agree to hold the mortgage, so they were obligated to find financing themselves. Knowing what I know now, I would agree to finance an adjustable mortgage. It's a relatively safe investment if they have enough down payment.

It takes so long to evict someone now that it doesn't matter what kind of contract you have. We're out of the rental business now, but it took us 9 months to evict the last deadbeat because she knew how to work the system. We have a judgement against her for $6000 which we'll never see. We started doing criminal and credit checks on every applicant after that experience. If we had done that with her we would not have rented to her because she had charges for check bouncing in another state. We charge $100 non refundable. If they take the unit, that cost is applied to their rent. That really helped weed out the bad apples.

 

[sweettractors]

Thanks for the advice. The reason I am even thinking about this possibility: I bought a rental home in town last fall and the next door neighbor told me he paid $38K for his home (A twin to mine) and it was a rent to own with $5000 down and monthly payments going toward payoff. He was bragging that he would only have $92K in the house when it was paid off. I would not mind being the "banker" for that kind of return?--Ken Sweet

 

[dummy]

If they are rental units now, unless you're trying to unload them, what do you perceive to be the incentive to switch to a rent to own? If you're willing to fool with it that way, why not hold the mortgage(s) and sell them outright. Couple of advantages, monthly income and if they default you get the property back. IMO, nothing that can't be handled with a good real estate attorney and title attorney, zero need for a real estate agent.

 

[sweettractors]

All my homes, farms, building lots were bought to resell. While waiting to sell, the Rental income only helps offset fixup, insurance, taxes etc. costs. When we sell and finance the property we get 20% down at 10% APR with 3 year baloon. Rent to own is a selling option that seems to appeal to some individuals that dont have the larger down payment and dont want to throw rent money away.--Ken Sweet

 

[Indydirtfarmer]

</font><font color="blue" class="small">( All my homes, farms, building lots were bought to resell. While waiting to sell, the Rental income only helps offset fixup, insurance, taxes etc. costs. When we sell and finance the property we get 20% down at 10% APR with 3 year baloon. Rent to own is a selling option that seems to appeal to some individuals that dont have the larger down payment and dont want to throw rent money away.--Ken Sweet )</font>

Sounds like a plan!!! The only advice I can lend is to do what my father did with much the same arraingment... MAKE SURE YOU SELL TO QUALIFIED BUYERS.... Ones that (at least appear) can pay for what they buy.... By the level of success you,ve achieved, obviously you don't make a lot of bad business decisions. Just be carefull of who you sell to, and there's a BIG market that'll open up to you with those terms.

(In 40+ years of buying/selling property, dad only got "burned" one time on a lease/purchase agreement. WHEN HE SOLD A BUILDING TO A CHURCH......)