How to sell my house on a rent to own setup

Question

Hope this is the correct area to post this.

I would like to sell a house to a tennant on contract.  I am just buying this house so I do have a loan.  She can come up with 5000.00 down and monthly rent is 450.00.  So how do I set up the rest of the deal?  Does some rent go twards the mortgage?

Please fill me in

Account Closed · Answer

It is also advisable to include in the agreement that the rent to own buyer only receives the purchase credit if the rent is paid on the first of the month.

Jason Hanson · Answer

Selling on a lease option A.K.A. rent to own is my favorite way to sell property. You will get high quality tenants because they are in the homeowners mindset since they will eventually own the house.

Russell Joseph · Answer

For us, more for a cashflow generation strategy as opposed to a wealth creation strategy.  That is, generate cash flow from rent and profits (when the option is taken) in order to invest in buy and hold high growth properties.

I'd be interested in other peoples thoughts on that question.

John Paul · Answer

Never heard of a rent to buy option - what are the advantages of that as oppose to just selling or renting?

Russell Joseph · Answer

Good point.

In your experience, how many of these RTO's don't take the option and is it the buyers that are not prescreened as well that tend to fall over?

Daniel Durham · Answer

Has your tenant buyer been prescreened by a mortgage broker to see if she can qaulify for a mortgage for your asking price and also how far out she is from getting qualified?

I suggest that you do that with all of your RTO tenant buyers.  That's a requirement I have with everyone on my buyers list.  Anyone who wants to take a house has to be prescreened first or I won't let them take it.  Follow up with guidance emails on credit repair and debt management and add in affiliate links to monetize off the list.

As far as a monthly rent credit... I agree to keep it low on a $450.00 a month rent.... nothing more than $100.00 that's applied to the purchase price on the back end ONLY if they excercise their option to purchase.  It never comes off the upfront rent  money.  Make sure to inform them that if they don't excercise their option to purchase the house, then they lose the option money and the rent credits because they are non-refundable.

Best regards,

Russell Joseph · Answer

One of the most important aspects to these is exactly as you alluded to and that is the 'exit strategy'.

That is, does the rent-buyer understand that we expect them to refinance and take the option to buy?  Most of the profit is made at this point.

While we cannot force them to of course, we need to be absolutely clear at the start that this is the purpose of the strategy.

We are considering setting up a mortgage broker to sort of 'pre-qualify' the rent buyer at the start so that if all things remain relatively equal they know that they will be able to qualify for a loan at the end of the option period.

Jon Holdman · Answer

A lease option is usually a combination of a lease and an option-to-purchase, both of which run for a specific length of time.  I like Andy Heller and Scott Frank's material on this topic.  In their approach, they agree with the tenant buyer on a purchase price up front.  If the tenant buyer chooses to exercise the option, they will get their own financing and pay you off.  If they choose not to, but don't want to move out at the end of the option period, you renegotiate and extend the lease and option or write new ones.

So, yes, it could go for a long time.  But, it could also get terminated for any of the reasons a lease usually gets terminated.  Not paying rent, illegal activity, whatever.  You would write the option to refer to the lease and state that if the lease was terminated for any reason that the option was also terminated with no refund of any option payments.  In theory, that gives them an incentive to keep up on the rent and take care of the property. In reality, who knows.

Heller & Frank's course has forms with it.

Thanks for that compliment.

Travis Elliott · Answer

I think that I am missing something here.  Dont I carry the contract for as long as they want to pay me?  Or do they have to get their own funding?

Russell Joseph · Answer

We have contracts for over here (in Australia) but they do vary slightly from State to State - possibly the same in the US, but your legal people should be able to advise on that.

You can get access to US standard option contracts, again that may need to be modified to suit your deal, as part of the package available at my website.   It may be a cheaper option than getting an option contract specially drawn up by your own people.

Perhaps also talk to various legal people in your area that have done these deals before.  It is important that they know how to make the paperwork fly or else you could get yourself into hot water!

As Wheatie said, you must keep the standard residential lease completely seperate from the option, and also take as much as you can up front as an option fee.  Money on the table from the buyer helps to ensure that they stay in the deal to the option date!