How to Sell Your House “Rent to Own”

How_to_Sell_Your_House_Rent_to_OwnYou’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

 

Option Agreement

 

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.

 

Upfront Option-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.

 

Ethics

 

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

 

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.

 

Quick Tip

  • 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.

 

Advanced Tips:

 

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.

 

  • Marketing

 

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.

 

Comments

  1. Phil,

    What if the renter still cannot get approved for a loan to buy at the end of their 2 year lease? Is that their bad luck and you keep the option money?

    Thanks,

  2. scott brown says:

    Hi my name is scott Brown I would like to network with your team.

  3. Bev Hamblin says:

    Phil,
    Marijuana, as you know is legal in Colorado. What we are finding with the Rent to Own is that most of the people who are calling and very interested in the Rent to Own, are not the $30,000 down payment with a $2200, per month payment, it is Always the the people who want to grow Marijuana in the basement or garage.
    We leased our personal home, Rent to Own, on a 3 year term. $12,000 down, 1,800.00 per month.
    He always paid on time with a direct payment. Never knew he was growing in our basement because he always paid on time. Toward the middle of the 3rd year, on a drive by, we noticed a coffee color stain on 3 sides of the house. Thinking it had to be defective siding, I sprayed water on the siding an it washed right off. That winter brown Icicles hung down over the gutters 12 to 15 inches. Neighbors never called or complained because he had set up the grow process correctly.
    Even though we tell the tenants no growing Marijuana and spell it out in the contract, we are finding that people with large down payments and high rents, will grow.
    How do we get around that???????
    Thanks,
    Bev Hamblin

  4. Michael says:

    Can you use a rent to own purchase for 4 families and less

  5. Shirley Gregory says:

    Hey Phil,

    Great video at the perfect time. I have a house that I am trying to sell but have had no bites. I live in NC and it appraised for $310k so how do I determine the upfront amount and the amount of the rental credit going towards the down payment? Should it be a set percentage of the monthly rent?

    Thanks!

    • Phil Pustejovsky says:

      Go to the Zillow Mortgage Calculator and using prevailing interest rates on a 30 year fixed rate loan, figure out how much goes towards principal on a $300,000 loan in the first two years, divide by 24, and there you have a good approximation of the rent credits. You want as big of an upfront payment as you can get, but at least 3 months of monthly payments.

  6. PrinceOney says:

    Phil Looking for Finance on an Apartment Complex 37 Units . Any Help ?

    • Phil Pustejovsky says:

      Watch YouTube videos put out by Peter Harris of Commercial Property Advisors on the subject of buying apartments and commercial real estate financing. He’s the man when it comes to that stuff.

  7. Moha Osman says:

    just quick comment in case if I am a cash investor meaning buying all my properties in cash , Rent to own would not be a good option for me , if I understood your video correctly ,waiting for your suggestion
    thanks

    moha osman

    • Phil Pustejovsky says:

      Whether you pay cash for your investment property or you get a loan; that has no bearing on whether or not you should do a traditional rental or a Rent to Own. The real question is; would you have a higher return on investment with less hassles, or no?

  8. Hi Phil,

    Great video as always–full of practical ideas! Five questions about your comments:

    1) Do you recommend only going to a real estate attorney for the legal help or do you feel that any attorney would be able to offer the necessary help?

    2) Are your rent credits the same as your profit? Let’s say that a home’s mortgage is $1,000/mo. and the typical rent for that size home in the area is $1,200-$1,300/mo. Would you then charge $1,200/mo. with $200 of that being rent credit or would you charge more per month?

    3) How do you determine what your upfront payment will be? Should it be a certain percentage of the asking price?

    4) If, after two years, the TB (tenant-buyer) still is not in a position to buy the home but is still desirous to make the purchase, do you renew the rental and option agreements or do you cut them loose and move on?

    and 5) Do you have any suggestions to help determine whether a home should be offered as a rent to own or whether it should be kept as an investment property?

    Sorry about all the questions! Thanks in advance for your help!

    Ed

    • Phil Pustejovsky says:

      (1) ONLY a real estate attorney well versed in creative real estate investing should be retained. Every other attorney will just suck up thousands of your dollars and be basically useless. Would you ask an Eye Doctor to perform open heart surgery on you?
      (2) Rent Credits are typically more tied to the amount of principal that a comparable 30 year fixed rate mortgage would be for the first two years.
      (3) Upfront payment should be at least 3 months of monthly payments, but even more is better
      (4) It depends on the tenant. Did they pay on time? Did they complain about every little thing? Did they throw huge parties and upset the neighbors?
      (5) I think all single family rental investment properties should be done on a Rent to Own; I see no solid reason why it would make more sense to do a traditional rental when there are so many benefits to a Rent to Own

  9. Anand, Madan says:

    Thanks Phil. Excellent. This is the best way to retain the property without risk. However if the tenant not able to buy and learn that he have to vacate the property may vandalize the property how one can handle that? Is there any safe guards N who pays the property taxes?

    • Phil Pustejovsky says:

      They are a tenant; and as such, if they vandalize, you can sue them for the costs to repair the damages. Plus, remember that they gave you cash upfront which can help pay for those damages too.

  10. Darren Bergan says:

    Slam dunk advise…again. Phil, you are amazing!!

  11. David Jackson says:

    Hey Phil thanks for the the lease option video, you answered alot of my questions my only thing is what would you say is the best way to market for these houses? Do you do the deal even if the seller is upside down? Im a wholesaler and I threw alot of these leads in the trash, I guess I wont now that I know you can do this type of strategy.

    • Phil Pustejovsky says:

      If the house is at break even (loan amount to as-is value) or very close to it, and the seller is open to a long term subject to, I’ll flip it to a seller financing buyer; and their down payment becomes my profit flip.

  12. Denise Southard says:

    How do you benefit by using both a rental and a lease option contract? Why mess with rent credits at all?

    • Phil Pustejovsky says:

      Rental Agreement and a separate Option Agreement is beneficial because when (not if) you have to evict a tenant, the judge will be looking at a Rental Agreement, not a Lease Purchase Agreement.

  13. What about the taxes on the property? Should I as seller pay or tenant?

  14. Sandra Thomas says:

    What can be done in Texas if you want to do a rent to own if they only allow 6 months? Is there a way to get around that legally?

    • Phil Pustejovsky says:

      You can do a 6 month option period and then after that, it can convert to a handshake, non-written option

  15. Craig Block says:

    Phil,

    Do I have to own my home outright (No mortgage) to be able to do a “Rent to Own”?

  16. Phuong Truong says:

    How can I find a good real estate and eviction lawyer given the fact that I’m just starting out and have no family member or friends that happen to know a real estate lawyer? Is there a website that I can go to so I can do research on them and call them up? I’m in Texas and you told in the video that Texas is more confusing with Rent-to-Own, so getting a real estate lawyer is the best for my situation.

  17. Tom Franks says:

    Phil

    Is the Purchase Option payment customarily applied as a credit to the purchase price if they exercise the option?

    Love your videos!

    Tom

    • Freedom Mentor says:

      The Purchase Option Payment is not a down payment. It is purchasing something of value; the option to purchase only. If the option to purchase is not exercised the Purchase Option Payment stays with the seller.

  18. Home owner wishes to sell their current house in order to be able to buy another property. They are concerned that if they do not sell for cash and extinguish the current mortgage that they would not be able to qualify for a mortgage on another property. If I purchase the seller’s property “subject to” and find a tenant buyer, will the seller be able to get bank financing on another property if they demonstrate that the property that they sold on a lease purchase agreement (where the deed is transferred) is being rented with an option to buy? In other words, will the seller have any issues in attempting to buy another house if they sell their prior home on a lease purchase? Does a new mortgagee (bank) care if the agreement with the tenant buyer is structured as a two year lease option (where the tenant-buyer gets an Agreement of Deed) or as structured as a rental agreement and a two year option to buy?

  19. I purchased a house at a foreclosure auction 6 weeks ago for 130k. (I am still waiting for the court to ratify the sale, which should take another month or so). I planned on doing a medium rehab (20k) and ARV should be about 230k.

    I did a drive by before the auction and saw the people moving out. However, after the auction I visited the property and saw that it still has occupants. It turns out that the occupants are, Bill, the 30yr+ son of the foreclosed homeowner, and his pregnant fiancé and their 3 kids.

    I organinally wanted to Buy rehab and sell it, but now Bill has told me that he has lived in this house his whole life and wants to buy it from me. I sent him to a creative mortgage broker who told him (and me) that there is no way he would qualify for a mortgage for a very long time.

    This may be a viable solution for us, however I would be going into this knowing that he probably will never qualify for a loan. And also I bought this for cash. So my money will be tied up if I go with a rent to buy.
    Question 1) if I was planning on walking away with 60k profit in 5 months (or less) if I rehabbed; what would be a reasonable profit if he exercises his right to “purchases” it from me in 6 months from now. What would be a reasonable down payment?
    Question 2). Must the money that is used as a down payment be considered a “down payment” of the total sale; or can it be just a “option” payment and hence it will not effect the agreed upon purchase price.
    Question 3). Would you think that it would be a good idea to finance it now and get as much cash as possible out (that may cost me more than 3k). And then just be happy if I walk away with any money after his monthly payment.

    • Freedom Mentor says:

      Stay with your original plan. This is never going to work out well.

    • Freedom Mentor says:

      I would never get in to a “deal” with the owner who just lost this home to foreclosure. This will end badly. Stick to your original plan or consider wholesaling if you do not have experience rehabbing.

  20. DAVE JACKSON says:

    Hey Phil thanks for simplifying this method! good stuff

  21. Jessica Krzywicki says:

    So if they back out, they don’t get the initial downpayment back and they also do not get those mortgage credits?

  22. As an investor should you pay cash for a property you are going to use as a rent to own? If so, how do you justify tieing up this much euity? Or is it better to finance it? What do you do if the tenants destroy the property and you have that much cash in it?

    • Phil Pustejovsky says:

      Better to structure creative financing so that you don’t tie up your credit. But second best would be to obtain financing from a lender. Worst approach is to pay all cash because they you are not using leverage responsibly.

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