You're about to discover the power of selling your house as a Rent to Own with a basic lesson to help you avoid the pitfalls and even some advanced strategies to maximize your results. The Rent to Own concept is sometimes referred to as a Lease Purchase, a Lease Option or a Lease Purchase Option but they are not all exactly the same. In fact, as you'll learn, combining the lease with the ability to purchase the property into one agreement can have very different legal consequences than separating them into two documents, a rental agreement and an option to purchase agreement. The opportunity to offer homes on a Rent to Own is absolutely enormous in today's market and very few investors take advantage of it. When you do though, you can maximize the selling price of your property, avoid real estate commissions and skip the majority of the headaches of being a landlord. Plus, for those properties that need a little bit of TLC, the Rent to Own can be the silver bullet to move that stubborn property quickly and easily. The Rent to Own is a homerun if you do it correctly and this video shows you how:
How to Sell Your House as a "Rent to Own"
If you currently own a home and have any interest in selling or renting it at some point in the future, selling as a rent to own can potentially put tens of thousands more in profits in your pocket.
If you're renting, a rent to won almost completely eliminates all landlord headaches. Plus, right now there is a huge opportunity to apply this technique in today's market
Three Ways to Turn Your House into a Cash Flowing Machine
This was the title of a previous video in which I describe the concept of offering a rent to own on a single family home. Judging by the feedback, many people had never heard of this before, even though it has been around for a very long time. Sometimes it's called a lease purchase, or a lease purchase option, but the reality is offering the property on a rent to own can be incredibly advantageous.
Why Rent to Own?
Reason 1: More Money
When you offer a property on a rent to own, you first get what is called an up-front option payment. This payment is a nonrefundable, upfront payment that can range from $3,000 all the way up to $10,000 or more. If the purchaser decides to not buy the property you get to keep this money free and clear.
If a rental landlord receives a deposit, they are required to return the deposit once the lease is up; but with a rent to own, the up-front option payment, is completely nonrefundable.
Reason 2: Increased Rent
Many times you can increase the rent by offering rental credits on a property. Rental credits are applied towards the purchase price of the property.
Increased Sale Price:
When you sell a rent to own you can have an increased sales price and because there is no real estate agents involved, you will save on that 6% commission. You can also typically sell a rent to own at the top end of what it is appraised for, which is often more than it would sell for in the open market.
Reason 2: No Landlord Headaches
When you're a landlord, there is always a fear of something going wrong and needing fixed. With a rent to own, since the person is going to become the owner, the tenant is responsible for most maintenance of the property. Because the tenants are in a locked-in-option price, they feel responsible for fixing up their own home.
Quick Little Caveat
Landlord and Tenant Act may supersede this, and that's happened to me before when a HVAC went out. My tenant didn't change their AC filters for two years and I ended up having to fix the HVAC because of the Landlord and Tenant Act. So it's pretty much no headaches, but obviously, there can be a couple of extenuating circumstances.
Number Three: Huge Opportunity Right Now
The largest potential home buying population right now are millennials. Millenials are the generation that are out of college, and in their twenties and thirties. This twenty-year block of people is a huge potential rent to own buying audience because 50% cannot qualify for a loan. They are at the age where they are settling down, having kids, and they want that single family home with the white picket fence. This is a huge opportunity right now because there are so many people that fit into this category and are perfect for a rent to own.
A Giant Opportunity
Selling a home as a "Rent to Own" is a huge ocean of opportunity that not many are taking advantage of , so you don't have hedge-funds, or Wall Street that have thousands of homes. There is an immense amount of people that fit into the rent to own category due to bad credit, self employment, or other reasons that make it difficult to qualify for a mortgage.
Rent to Own 101
A rent to own is sometimes referred to a lease purchase or lease option, but the idea is that the person is renting the property with the option to purchase, so you've structured a purchase price for some point in the future. My suggestion would be to not do a lease purchase or lease purchase option agreement. Instead, first set up a rental agreement. The rental agreement is your typical rental agreement, except the tenant is held responsible for all maintenance, and repairs.
If you do not know how to set up a rental agreement, I want you to hire the best eviction attorney in the county where the property is located. Ask the very best eviction attorney for their rental agreement, and then add the tenant maintenance responsibility clause to it. Also require a very small deposit
The second document I want you to put in place is called an option agreement. This is a separate document that is going to stipulate what the price is, and it's also going to stipulate, in some cases, what the rent credits are. Rent credits are credits are a portion of the rental payment that goes towards the purchase price, when a person makes an on-time rental payment.
This upfront option-payment is what the tenant pays for receiving an option agreement on the property. The potential tenant buyer pays for the agreement of an option to buy.
The price of the house is going to be the maximum amount it will appraise for, because they're typically going to be getting a loan. We're not asking for you to sell the property for more than value. We're telling you to sell it for the maximum amount it can be valued at.
What ends up happening is if the tenants don't pay, this is the document that you bring to court to evict them. Then, this is the document that stipulates that this amount is nonrefundable, so if they get kicked out, they also lose their option money as well.
There are many arguments of the ethics of a rent to own agreement. If a rent to own tenant does not pay, they are kicked out and you do not have to pay back their up-front option payment. If someone purchases a home from a bank, they are required to put down a down payment. If they do not pay their loan, the house is foreclosed on, and the bank keeps their down payment.
An option agreement is a great deal for a tenant buyer. The price is locked in for a selected period of time, which means if the value goes up, the tenant buyer benefits because the price is locked in from when they first moved in. I think it is fair on both sides; if you do not pay me, you will get kicked out, and you will lose your upfront money.
Most Won't End Up Buying
Another major detail with rent to owns is that the vast majority of people do not exercise their option to buy. If they do buy, they are buying at the max amount you can sell for, and you do not have to pay any real estate commissions, so it is great when they do buy, most just don't. If they don't, I am okay with that, because I do not lose money either way.
If they don't take advantage of the opportunity to purchase, that's their own fault, but I'm at least giving them the opportunity.
Rent credits help the tenant buyer build some equity and pay down the purchase price. If the price is $100,000 and a tenant buyer puts down a $5,000 down payment, they now owe only $95,000. If they are paying rent on time and earning say $200 in rent credits a month , that is $2,400 a year. This money is applied towards the purchase price, so that when it comes time to purchase, they owe less. This is absolutely fantastic for people serious about renting to own.
Upsides for Them
Typically at the point in which a tenant buyer can exercise their option to buy, they will be applying for a loan. They will need to get some sort of loan in order to pay you off because you are not going to be holding into this deal and giving them rent credits for the next thirty years. You give them a set period of time, which they can use in order to get their credit right, and improve any issues, that have kept them from qualifying for a traditional loan.
- Rent credits don't always apply in every state, so study up on your state laws. In cases where rent credits don't work well for you, you can offer rent credits when they first move in, on the condition that their payments are on time.
1.Tenant buyers are monthly payment sensitive
Just because you're giving them this great opportunity, they don't always do the math that the monthly payment is the same amount that it would be if they were getting a mortgage.
They look at it as renters, and so they're going to compare the math to what it cost to rent, so make sure you don't try to overprice the monthly payment.The only way you can get away with that, as I mentioned, you can sometimes increase the rental rates, is that if you offer rent credits and you say, "Well, okay, if you do a thousand dollars a month, then you will get a hundred dollars going towards your rent credits, but if you go to eleven hundred a month, then I will give you three hundred in rent credits.
In most cases, statistically they're not going to actually close on the property, so I can raise the rent by a hundred and still make out better by offering to give them three hundred in rent credits because they may never take advantage of the option to purchase.
2. Get Good Legal Help.
The issue is when you have an option to purchase and a rental agreement at the same time, does that spill over into being an installment sale, or laws related to making sure you handle your owner financing correctly? I've got a whole video on this law, but the bigger problem is if you ever tried to evict a tenant buyer because they are not paying you, a judge could argue that it was an installment sale and must go through foreclosure.
In most cases, if you're doing a rental agreement and an option agreement, you don't have this problem, but I'm not giving you legal advice, so make sure you have good legal help.
2. Send Calls to Voicemail
If you run a CraigsList ad or put up signs about your rent to own, you are going to get a lot of phone calls. Make sure to send these calls to voicemail because odds are you are going to get a lot of them.
Rent to Own Pitfalls
- Choosing Unwisely
I have a great video on what every landlord should know about property management. The main rule is to choose your tenants, or in this case tenant buyers, wisely. You've got to research their situation; look at where they live now, where they lived before, talk to the previous landlords. You can even drive by where they currently reside to see how they are treating the property, because its probably how they will treat your property as well. Also be sure to research their employment because you need to make sure you are hiring the right person to move in, because it is a lot harder to move them out, if things go bad.
- No Legal Help
In the state of Texas you can't to a lease purchase for more than six months. Make sure you know the laws in your state by getting legal help do everything right.
- Low Down Payment
Make sure you ask for more then what someone would be putting down as a deposit on a normal rental. Your nonrefundable option payment needs to be more to show you that the tenant buyer will be able to afford the monthly payments and are ready to be homeowners. Being a homeowner is expensive so make sure you chose wisely, both from the perspective of them being a tenant, and how much they've got available to put down.
Market heavily to get the phone calls and responses needed to find the few people that have the money to put down a $3,000-$10,000 option payment, because this substantial amount of money makes it less likely for people to walk away or cause problems. Usually the bigger the down payment, the safer of a deal it will be. Banks ask for 2o% because the know that the bigger the down payment, the better the borrower will be.
That's how to sell your house rent to own. It can be incredibly profitable, it can reduce landlord headaches, and there is a huge opportunity to apply it in today's market, but you've got to do it cautiously with the right legal help to make sure you have all of the details tied together.