Why does rent to own make sense

Have you ever dealt with bad renters?   Late payments?  Stains on the carpet?  Calls late at night about a stopped toilet?  Sometimes being a Landlord is not a fun game, especially when you have a nice home and bad tenants.

Have you taken advantage of the recent low interest rates and refinanced your home to the maximum?  What about a home equity loan or other form of second mortgage?  Do you know how much you can walk away with from the closing table after paying all mortgages and associated costs, like realtor fees?  Many people walk away with very little or nothing.  Some even have to pay.  If this scenario applies to you, it may make sense to delay the sale of your home.  It may be possible to generate positive cash flow and lock in a higher selling price with a FSBO (for sale by owner) lease/purchase agreement.

Here’s another scenario: You want to sell your own home, but it’s not moving as fast as you would like (or as fast as the “fast-talking” realtor who convinced you to list it).  You’ve thought about renting it to cover your mortgage payment, but nobody wants a short-term rental with no idea when they have to move out.  And what if the tenant WON’T move out when you have it sold? A FSBO lease/purchase agreement could be a solution.

So you decide to leave it vacant.  You make two, three even four mortgage payments.  Your insurance company cancels your homewoner’s policy because it has been vacant for more than 30 days (it’s true, they can do it so read your policy!).  You don’t want to severely discount the price, yet you need to do something NOW!  Here’s a FSBO solution – lease with option to buy or lease/purchase (also referred to a rent to own).

What does the FSBO lease/purchase of a home mean?

Lease + Purchase Offer = Lease/Purchase Agreement

At some time in your life, you have rented a house or apartment, so you are familiar with a lease agreement.  If you have ever bought or sold a house, you are familiar with a purchase offer.  The lease/purchase agreement is a hybrid of the two – a lease agreement combined with a purchase offer (sometimes called “rent-to-own” or an “option,” or that is, the right to buy the property at an agreed upon price).

Here’s an example of how lease/purchase works.  Let’s say you have a house worth $100,000.  The “going rent” in your market for that house may be about $800 per month.  A lease/purchase agreement would read essentially as follows:

  • Lease Term: Two Years
  • Monthly Rent: $800
  • Purchase Price: $100,000
  • Rent Credit: $400/month

Usually, part of the monthly rent will be credited towards the price of the house.  In the above example, 50% or $400 per month is being credited.  So if the tenant decides to buy after one year (lawyers call this “exercising their option to buy”), they would pay $100,000 – $4,800 = $95,200.  If the tenant/buyer does not purchase the property, the owner would keep all of the monthly rent.  The best part is, the $400/month is considered “option consideration” by the IRS and does not have to be reported as income until the house is sold or the lease/purchase agreement expires!

As you can see, there are many benefits a lease/purchase can provide you, including:

  • Immediate relief from mortgage payments
  • Fast Solution to the “Nice House in a Slow Market” scenario
  • Guaranteed no vacancy
  • No need to severely discount the purchase price
  • Tax deduction (since the property can be treated as “rental” for tax purposes)

Why Don’t I Just List it With A Real Estate Agent?

It can’t hurt to list with a real estate agent or broker. However, most real estate brokers simply “list” your property.  This means they stick it in the multiple listing computer and wait for a bite. The first problem with this method is that there are thousands of other homes in the computer that read just like yours.  If you want to move your house FAST, you have to offer something different.  The lease/purchase is that special something that makes your house attractive.

The second problem is that most Realtors don’t know what a lease/purchase is, how it works, and how to market such a deal.  Most Realtors will not get involved with a lease/purchase, because they simply want a higher fee (after all, they have to make enough money to pay for those large display ads with their picture on it!).

A lease/option can be the perfect solution for a stagnant property in a down market.  It just takes a bit of creativity and the ability to work “outside the box.”

Bill Manassero is the founder/top dog at “The Old Dawg’s REI Network,” a blog, newsletter, and podcast for seniors and retirees, that teaches the art of real estate investing. His personal real estate investing goal, which will be chronicled at olddawgsreinetwork.com, is to own/control 1,000 units/doors in the next 6 years. Prior to that, Bill and his family lived in Haiti for 11 years as missionaries serving orphaned, abandoned and at-risk children.