Rent To Own and Lease To Own

Rent to Own… a different kind of animal.

When the term “rent to own” pops up, it’s not always clear what it means, and that’s partially because renting to own and the similar plan lease/option can work numerous ways.

What can possibly be more confusing that “Rent To Own”?  If you ask a hundred folks what is meant by rent to own, you will get back 150 different meanings.

Let’s hope that I can put some of this confusion to bed right now. I am a landlord now for many years and have seen just about every possible type of renter.

Many are hard working folks just looking for a place to lay their head. However in some cases the person is just simply out to scam the landlord.  A good credit check with references and a good rental history can lay this to rest. It’s extremely unlikely that someone with a good credit record and a good rental history will scam you. But keep in mind it does happen… I have seen it all in some rare cases, the tenant will set up references such as family and friends to vouch for them.  One good way to divert a situation like this would be to look up the voucher’s name in the city records for the property that the tenant claims to have rented from them. If its a fraud, then the city record will show that the person vouching for the tenant does not own the property that they claim to have rented to your potential tenant.  A big red flag!

But let’s get back to the reason for this post…. that of turning a rental property into a Lease to own or rent to own.

In a simple scenario, the tenant will be allowed to rent for a set period of time in many cases the time period will be set for one year.  At the end of the year, the tenant is given the option to purchase or in some cases when credit problems have not been cleared up.. they may be given another year to be able to purchase the house.  Don’t get caught short, make sure your lease to own agreement specifically details what is to happen at the end of the year in the instance that the tenant cannot purchase the home.

Be sure to try to get some portion of the closing costs included in the package when the sale actually does occur.  For example let’s say you pay $1,000.00 down for the right to purchase in one year, and your monthly rent is $900 each month.  You might negotiate that for each month that the payment was made on time, $100 of the rent money will be kept in escrow and applied to your closing costs when you actually do close the deal.  Of course if you never close then the $1,200 accumulated in escrow will go to the landlord at the termination of the deal.  This is why it is so  very important to negotiate up front what will happen in case your cannot close at the scheduled time at the end of the year.  For example you could agree to pay an additional $500.00 for the option to continue the lease to own for an additional year.  That way you will not lose the $1,200 that you have accumulated and at the end of the following year you will then have $2,400 in the escrow account,  Make sure all this is in writing, as its very difficult for a judge to determine the truth when you just have a lot of he said… she said…

A very common agreement is that the tenant is given a lease to own when they put down 3% of the pre determined sales price.  This down payment will be non refundable if the lease to own fails to go to closig and it is not the fault of the landlord.  Keep in mind, that with this type of agreement the tenant is not bound to purchase the home at the end of the designated time period, however if they fail to close then they may lose their entire or parial down
payment.  Make sure exactly what the tenant will lose is clearly pointed out in writing.  Don’t leave any room for guessing what was meant at the time of the deal.

The lease to own can be very appealing to anyone with little or no saving which would otherwise allow them to make the downpayment required to purchase the home.  Additionally it gives the tenant a whole year to clear up any negative credit reports that may be on the tenant’s records.  Also if the lender can then inspect the rental records and see that this tenant has made all 12 payments on time and without fail… automatically increases the strength of the tenant when he goes to apply for the loan.

If you are interested in purchasing rather than renting then check out the links below to all the homes for sale in the Hampton Roads area.

 

 

 

 


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Alan M. Keffer | Broker | 409 Slate Street | Chesapeake, Virginia | 23322
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