How the Rent To Own Works
A “rent to own” arrangement is also known as a “rent with option”, “lease purchase”, and “lease option”. It is a combination of a lease agreement and a purchase option agreement. Most people know what a lease is. Under the purchase option portion of the lease purchase agreement, the “landlord/seller” gives the “tenant/buyer” an exclusive right to purchase the home at a pre-determined purchase price” during the lease term as long as the tenant/buyer abides by the terms of the lease. In exchange, the tenant/buyer gives the landlord/seller a non-refundable monetary amount, called an “option consideration”. This option consideration is usually given in lieu of a security deposit and is often credited towards the down payment when the tenant/buyer excersies their right to purchase the home. The amount of option consideration set by the landlord/seller is often on a sliding scale, typically between 1-10% of the purcahse price, based on the tenant/buyer’s qualifications.
- TENANT/BUYER WINS ~ Unlike a security deposit for a standard rental agreement or a down payment on a purchase contract, the option consideration is what is placed down when a tenant/buyer under a rent to own agreement.
- LANDLORD/SELLER WINS ~ The option consideration is non-refundable and typically more than a security deposit when compared to renting. It is typical to ask for between 1-10% of the purchase price as option consideration, depending on the applicant’s qualifications.
The main factors in determining the qualifications of a tenant/buyer are:
- Rent history (no evictions in past 5 years)
- Job history (2 months of documented income must be shown)
- Credit score (520 minimum, no pending bankruptcy)
- Amount of option consideration tenant/buyer has available to place down (more option consideration given can offset lack of qualifications in other area)
There are a few things that make the rent to own agreement different than a “standard purchase agreement” or a “standard rental agreement”. Below are some of the differences based on the landlord/seller using the rent to own agreement provided by theRTOplace.com:
- Security Deposit ~ Unlike a standard rental agreement, the rent to own agreement does not require a security deposit (or if required by state law, a minimal security deposit may be required). Why? The security deposit is replaced by a non-refundable option consideration. The option consideration gives the tenant/buyer the exclusive right to purchase the home during the rent to own term, as long as the tenant/buyer abides by the terms of the agreement. And, unlike a security deposit, the option consideration paid up front by the tenant/buyer is credited towards a down payment if the tenant/buyer wants to convert to traditional financing later.
- Maintenance ~ Unlike a standard rental agreement, the rent to own agreement requires the tenant/buyer to perform most maintenance on the home. This gives the tenant/buyer the opportunity to really experience some home responsibilities before actually committing to purchasing.
- Rent Credit ~ The rent to own agreement has the landlord/seller provide the tenant/buyer a “rent credit” during the term of the rent to own agreement. Rent credit is a predetermined amount of the monthly rent that goes to reducing the purchase price. It is given only if the tenan/tbuyer makes “on time” monthly payments and abides by all the terms of the rent to own agreement.
- TENANT/BUYER WINS ~The tenant/buyer accumulates rent credit to help reduce the purchase price.
- LANDLORD/SELLER WINS ~ In exchange for rent credit, the tenant/buyer agrees to do things such as pay on time, make minor repairs to the home, and take the home in “as-is condition”.
The tenant/buyer gets to move in once the option consideration and first month’s rent is paid and the rent to own agreement is signed. During the lease term, the tenant/buyer can work out any credit issues and/or save for a down payment required to obtain traditional financing prior to the end of the rent to own agreement.
The tenant/buyer makes rent payments to the landlord/seller during the term of the rent to own agreement. The landlord/seller is obligated to pay any underlying mortgage, condo/homeowner dues, tax, and insurance payments. The landlord/seller still gets any tax deductions for these items while making those payments.
- TENANT/BUYER WINS ~ The tenant/buyer has time to repair their credit and save any other money required to qualify for tranditional financing.
- LANDLORD/SELLER WINS ~ The landlord/seller should receive a steady payment from the tenant/buyer, which is valuable if the home is currently vacant or about to become vacant. Unlike a typical home purchase that may take 30 days or more to get bank financing, the home is occupied quickly and a monthly payment is received until the end of the rent to own term or the tenant/buyer qualifies for traditional bank financing, whichever comes first.
Once the tenant/buyer is able to obtain traditional financing to exercise their option to purchase, the tenant/buyer notifies the landlord/seller. Closing is arranged, title is transferred, and the tenant/buyer experiences all of the benefits of home ownership (tax deductions and appreciation). After closing, the tenant/buyer stops making rent to own payments and starts living and loving the American Dream of Homeownership! The landlord/seller has sold the house and avoided paying costly real estate commissions.
- TENANT/BUYER WINS ~ The tenant/buyer is able to live in a home they currently don’t qualify for under traditional financing guidelines and buy it later so they don’t have to move twice.
- LANDLORD/SELLER WINS ~ The landlord/seller has a consistent payment coming in until the tenant/buyer is able to qualify for traditional financing and gets to sell while avoiding real estate commissions..
Rent To Own Process/Profit as a Realtor
The Rent To Own creates a true win/win situation with Realtors and Sellers. We can help you structure a Rent To Own so you still get a 3% commission on the sale of the home once the tenant/buyer purchases the home. Read the benefits to your seller by reading the landlord/seller section of our website so you know how the process works for them and you can answer their frequently asked questions (FAQs).
Read the “Qualifying the Home/Seller” to see if your home/seller qualify to do a Rent To Own. If they do and you’d like to know more, go to the Rent To Own Your Listing Now section and tell us about the home you think makes a good Rent To Own candidate. We can help explain the process to you and the seller to move forward. The seller would need to give us written authorization to Rent To Own their home. Remember, there is NO COST TO YOU OR YOUR SELLER, and if the property is already listed, there is NO OBLIGATION TO YOU OR YOUR SELLER if you find a buyer before we find a tenant/buyer that is acceptable to you and your seller!
When authorization is given by the seller, we would market the home at NO COST TO YOU OR THE SELLER. Any applications we receive will be run through a mortgage broker to determine qualification. That information is shared with you and your seller to make the determination on who goes into the home. Once a Tenant/Buyer is selected by the Landlord/Seller, the Rent To Own agreement would be signed where the seller agrees to pay you your commission when the Tenant/Buyer exercises their right to purchase under the agreement. The Tenant/Buyer would move in and make Rent To Own payments directly to the Landlord/Seller.
Once the Tenant/Buyer is qualified to purchase the home, closing is arranged. At closing, you would receive the commission as outlined in the agreement directly from the closing company.
Qualifying the Home/Seller
- Home must be in fairly good condition. “Fixer upper” homes don’t work well as a Rent To Own as the homes must meet occupancy requirements for tenant/buyers to move in without any issues.
- Seller must be current on payments. Having a seller default during a Rent To Own can be a nightmare and it should to be avoided if the seller is currently behind on payments. The Rent To Own is not designed to help people avoid foreclosure.
- Seller must want to do a Rent To Own. Ask your owner if they would consider doing a 1-2 year Rent To Own. Sellers with a lot of equity in their home looking to buy another home may be able to refinance their existing home while they are still living in it, to use that equity to buy another home (ask a mortgage broker for details). Sellers that are considering renting or have previously rented their homes will benefit tremendously from a Rent To Own compared to just renting their home because they will get a someone that is hoping to buy their home and will treat the home more like a homeowner than a renter. Additionally, our specialized paperwork is built in with incentives for the tenant/buyer to pay on time and perform minor maintenance to the home. Make sure to read our landlord/seller section so you know how the process works for them and you can answer their frequently asked questions (FAQs).
If you’ve talked to your seller and they would consider a Rent To Own, and you would like to work with us to Rent To Own their home where you still get a full commission, please contact us now!