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 For Landlord/Sellers
Once you understand what a rent to own is, below are details for how the Rent To Own process will allow you to get your monthly payment covered FAST and sell your home for top dollar and commission free!
- Click here to give us authorization to Rent To Own your home. There is no obligation, so if you find a buyer or renter for your home before we do, we’ll simply step to the side at no fee to you.
- We market your home to our existing list of tenant/buyers that are interested in purchasing in your area. We also market your home through our website, local signs (that do NOT need to be at your property), and various forms of internet marketing.
- We show your home to prospective tenant/buyers at a day/time that is arranged in advance with you, so people won’t just “stop by” like they would if it was listed.
- Any applications we receive will be run through a mortgage broker to determine qualification. That information is shared with you and you make the determination on who goes into your home.
- If accepted, the tenant/buyer will make first payment and all follow on payments directly to you while they occupy the home. You pay the principle, interest, taxes, insurance and any HOA/condo dues. You still experience any tax write offs for the property as a landlord. The tenant/buyers will be responsible for all minor maintenance to the home during the Rent To Own agreement. The tenant/buyer is also given an incentive of a “rent credit” to pay on time during the Rent To Own agreement, which is NOT subtracted from the monthly rent you receive, but is only credited back to them if/when they purchase the home.
- Once the tenant/buyer is ready to purchase the home, they or their mortgage broker will contact you to let you know they are ready to buy. A local closing company will handle the settlement. At the closing, any option consideration and rent credit the tenant/buyer has accumulated will be credited back to them in the form of a closing cost or down payment credit.
- Congratulations! You’ve now sold your home for top dollar and commission free! The tenant/buyer will stop paying the you and start paying a mortgage payment to the mortgage company that funded them to purchase your home.
Rent to Own Frequently Asked Questions (FAQs) for Landlord/Sellers
Questions regarding the terms of the rent to own agreement have been answered as if the landlord/seller were using the paperwork provided by this website. Landlord/seller may use a different agreement with different terms.
Answer: If your ultimate goal is to sell a house, a rent to own is a great way to do it, without paying any real estate commissions. It is also a great way to move a house in a slower market. If you just want to rent it out, a rent to own will give you additional security in terms of a non-refundable option consideration and committed tenants, but they will have an option to purchase it!! But, if you don’t want to ever sell it, then perhaps this is not the place for you to advertise.
Answer: This depends on the qualifications of the tenant/buyer you accept, and the loan they are able to obtain. The rent to own will attract as many as 3 times potential tenant/buyers when compared to just trying to rent or sell your home. Now, with the lending market more difficult to navigate, many good canidates can not purchase using traditional methods, so they are turning to alternatives like the rent to own.
Answer: That’s your choice. We recommend a one year rent to own, with a possible extension of a 2nd year if you like the tenant/buyer.
Answer: No. The tenant/buyer pays $1000/mo in rent. When the tenant/buyer is able to purchase your home, you’ll be crediting $300/mo back to the tenant/buyer at closing ($3,600 within the first year).
Answer: No, you can deposit it just like any other money you deposit. You are not required to escrow the rent credit. You will be crediting $300/mo back to the tenant/buyer at closing ($3,600 within the first year) when the tenant/buyer is able to purchase your home.
Answer: That’s your decision. I recommend you provide one year’s worth of rent credit ($3,600 in this example) and let it “carry over” to the next year, but do not provide rent credit for the 2nd year. But for more incentive, you may want to provide the 2nd years rent credit. That’s up to you.
Answer: No. Our contracts are designed for the tenant/buyer to get the full year’s rent credit regardless if they purchase in one month or one year. Think of it as a great benefit to you if they purhcase sooner in the lease term.
Answer: You can sign for however short a term you both agree to. But I recommend it is long enough to secure financing, and any problems that may arise. I usually have rent to own agreements go for a minimum of 6 months, but the tenant/buyer can execute their option to purchase any time within the lease term.
Answer: Officially the old option consideration does expire. Each situation is different, but I think it’s fair to extend the original rent to own agreement and credit the tenant/buyer their original option consideration. It’s up to you and the tenant/buyer if you want to charge an additional option consideration. Extension of the agreement will depend on how soon your tenant/buyer is able to purchase. You can also change the terms of the agreement (i.e. increase the rental and/or sales price) when you extend.
Answer: Usually rent credit will be credited against your closing costs, not the down payment… Although closing costs are similar to a down payment because it is money the tenant/buyer must pay when buying the home. But if the rent credit total you are providing to the tenant/buyer is higher than their closing costs (rarely the case), the rent credit may not go towards the tenant/buyer’s down payment… it would reduce the tenant/buyer’s purchase price. They could use the “excess rent credit” to “buy down” their loan rate. Typically only the option consideration goes directly towards the down payment.
Answer: No. It could be misconstrued as an installment sale or contract for deed. This may give your tenant/buyer equitable interest in the home, which would make it difficult to get them out of the home if they are unable to perform. Consult a local real estate attorney for details.
Answer: Technically the rent to own agreement is a lease until the tenant/buyer exercises their right to purchase the home, so you would still get the tax write offs until the tenant/buyer purchases the home. As always, talk to your accountant before entering into any agreement.
Answer: Yes. The tenant/buyer has the exclusive right to purchase the home, as long as they abide by all the terms of the rent to own agreement.
Answer: Most agents have no experience advertising homes as a rent to own. They are trained to either lease or sell a home. We are not real estate agents. We are a real estate investment company. We originally designed the rent to own paperwork for our benefit to sell our investment properties. We have specialized paperwork with incentives for the tenant/buyer to pay on time, perform minor maintenance, and purchase the home. A real estate agent’s paperwork would not have that. They will try to combine a lease and purchase contract together and miss out on the incentives listed above, and you would still be responsible for paying commissions.
Answer: Although a rent to own sounds like an obligation for the tenant/buyer to purchase the home, it isn’t. After all, if someone doesn’t have the ability to purchase or doesn’t want to purchase a home… it’s difficult to force them to purchase. The non- refundable option consideration shows the commitment a tenant/buyer to purchase the home, although they are not obligated to exercise their right to purchase.
Answer: Yes. All contacts will be directed to you.
Answer: Not directly. But there are some good tips on how to qualify them in our course.
Answer: Typically “No”, but you should ask a real estate attorney if some form of security deposit is required in your area by state law. If it is, take the minimum security deposit and the remainder in the form of a non-refundable option consideration.