Rent to own – Explained
As Vancouver Real Estate agents, we have see many advantages and disadvantages of rent to own I think we have many things we can share with you folks in the US. When you do a rent to own the tenant pays the habitue rent on the property , but adds a nominal monthly amount for – for a term of about say 4 years – at the end of which the owner allow him a an option to purchase the pad at a fixed price . The nominal fee over 3 years is applied to the purchase price (in most cases the tenant now also qualifies for a 5% down payment ). If he does not execute the option, the ‘premium/overage’is forfeited to the proprietor (after all he had to wait 3 years to find out). As a seller you should only do such a thing if you do receive an excellent price!
How to structure a rent to own?
Depending where you live there are hundreds of way One possibility is to have the tenant sign a complete Real Estate offer of Purchase and Sale. There is an addendum to the contract that lays out that a definate portion of the rent goes towards the purchase if the tenants complete the contract. It also specifies that failure to pay rent or meet other terms such as an increase of deposit will cancel the contract. The amount of the surcharge , of course, is at a premium to market rent and usually the amount credited to the purchase is that amount of the surcharge . In all cases if the contract is not honored the ‘overage or premium’ is forfeited.
One thing you should NEVER DO is give title of your home with no downpayment to anyone! – buy yes, sell no . The only constant is change. The tenant loses his job, follows the lure of the wild, discovers the joys of his secretary and there you are. To take your house back from a lazy buyer that has no equity in the property is a HUGE HEADACHE !
The most important factor is to have everything in writing. Having things in writing won’t make bad people good and won’t make good people better; all it does is delineate the parameters of any legal carry through. You never want to take legal action if you can possibly avoid it. But a strong rental agreement allows you to make convincing threats.
Pros and Cons – Why rent to own?
( The following is for Renters – show this to your owner )
• Great Market Price in tough markets (perhaps in today’s market in some US Cities ?). Get the property at market value or better. You also have more tenant/buyers who are willing to pay a premium because of the terms.
• MUCH BIGGER rental income. Increase positive cash flow.
• Higher rental cash : It is one way to make a property have cash flow that otherwise would not.
• Non-refundable option or ‘premium – overage of rent’ up front.
• Avoid a commission: Although there are ways to pay a Vancouver realtor as well. ( Not much competition…most Realtors don’t understand it – and some lawyers!)
• Lower advertising costs. Run an ad for rent to own in today’s market and see what happens!
• Get a much better tenant : Someone who wants to own , even if in the end he does not end up buying, will make sure you home is in much better shape . There could be quality people in the recently divorced, self employed or new immigrants.
• Less maintenance : Less management. Tenants that feel a “pridefulness of ownership” will pay on time, execute maintenance, and make improvements to your home. You could also write maintenance as a condition into the deal.
• Many more buyers: You are spreading the base from buyers only to renters/investors.
• Lower vacancy rates : Your phonewon’t stop ringing when you advertise your home as a lease/rent to own purchase deal.
Write a great contract. Legal documents are far more complex. Have a lawyer/notary or a Vancouver real estate agent witness it. In a crashing market the renter WILL want the option price and rental premium back. I guarantee it!
Also , sellers should whenever possible make very good use of a “rent to own” agreement rather than a contract of purchase and sale in homes that are far away, say around lower than $50,000. It is a real hassle to foreclose on a buyer who failed to pay the rental fee. It is much easier to simply cancel their contract.
Why do it? Tenant/Buyer Benefits:
• Grow equity. Sometimes a family cannot get together a down payment.
• Knowing what you will buy. Checking it out for say 2 or 3 years, having the price fixed.
• Rent money is not wasted . Each month a portion of rent comes off of the sales price eventually.
• The full option deposit is not lost. This cash will be 100% credited to either the D.P. or the sales price.
• Minimum cash out of pocket . With a lease purchase, there is only the first month’s rent and an option deposit to pay; no down payment, no closing costs.
• Low down payment needed The option deposit plus the rental rebates will likely take care of the whole down payment.
• Assign the contract. Wherever possible, get the right to assign the contract. If the market goes up, you could assign the contract for a tidy profit.
• Increased buying power. Your buying power is dramatically increased.
• Less credit problems. Qualifying is not as strict as conventional financing.
You will be approved at the sole discretion of the landlord/seller. You will have time to repair your credit, find the best financing available.
Check it out! You have full control of the home – and some real time to see the leaks! .
It is vital to have an ironclad contract. Insist on one. Pay for one. If the market rises fast, the owner WILL try to get out of the deal. I guarantee it! You do have more leverage as a buyer. With a lease purchase contract, you can control properties that commonly require 10-30% down for a nominal amount of money without using a lender or going through the loan application process. Yet you will receive the same features.
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