Rent to Own Properties for First Home?
Good Morning BiggerPockets members,
What are your thoughts on a rent to own property. I am looking for various avenues to finance my first deal. I recently came across some rent to own properties. Are these worth pursuing?
Quote from @Pedro Hernandez:
That's a very generic question. What are the terms of the deal?
I don’t love the rent to own concept for a buyer as it is often structured as a way to help the seller “sell” to a few renters and recoup all deposits etc multiple times… a lease option or a contract for deed - if your state has those - are a little cleaner and simpler.
@Pedro Hernandez any strategy can work but it depends on the numbers. Possibility of rent to own being a great deal is pretty low, but what you need to do is learn the numbers for your market that way you know if it is a good deal. While learning the numbers you will find deals and opportunities.
Go get it!
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#3 BRRRR - Buy, Rehab, Rent, Refinance, Repeat Contributor
- Investor
- Austin, TX
Rent to own attracts a lot of shady landlord. The terms are usually sharky and leave you in a position that you would have been better off renting. Get a realtor to look over the documentation before you sign anything
Agree with others, we can't know for sure about this deal without more specifics but in general rent to own favors the seller.
@Pedro Hernandez and all - "Rent to Own" is a way to advertise selling on a lease option or contract for deed. Same thing. Def research what is what on your market values and state laws. I have both bought and sold this way. And if done right, it is a win/win(/win) for all parties. I have sold to a few other investors on L/O as well.
My biggest caution to you is don't put more than 3% of the purchase price up for option money. There is no need. That should be a beacon of what the seller's motivations are. Because of some greedy bastards, "rent to own" has gotten a bad name in some areas but is one of the best ways to do seller financing, IMHO.
If you can be more specific about the other terms like rent credits and how long the option lasts, I'd be happy to let you know if it looks fair or not.
Quote from @Nathan Gesner:
Quote from @Pedro Hernandez:
That's a very generic question. What are the terms of the deal?
I don't have a deal lined up, I just wasn't sure if it is a viable option.
Thank you,
Quote from @Chris Davidson:
@Pedro Hernandez any strategy can work but it depends on the numbers. Possibility of rent to own being a great deal is pretty low, but what you need to do is learn the numbers for your market that way you know if it is a good deal. While learning the numbers you will find deals and opportunities.
Go get it!
Thank you Chris I'll continue to learn the numbers.
Quote from @Eliott Elias:
Rent to own attracts a lot of shady landlord. The terms are usually sharky and leave you in a position that you would have been better off renting. Get a realtor to look over the documentation before you sign anything
Thank you Eliott, doesn't sound like it should be the first option.
Quote from @Shiela R.:
@Pedro Hernandez and all - "Rent to Own" is a way to advertise selling on a lease option or contract for deed. Same thing. Def research what is what on your market values and state laws. I have both bought and sold this way. And if done right, it is a win/win(/win) for all parties. I have sold to a few other investors on L/O as well.
My biggest caution to you is don't put more than 3% of the purchase price up for option money. There is no need. That should be a beacon of what the seller's motivations are. Because of some greedy bastards, "rent to own" has gotten a bad name in some areas but is one of the best ways to do seller financing, IMHO.
If you can be more specific about the other terms like rent credits and how long the option lasts, I'd be happy to let you know if it looks fair or not.
Thank you Shiela, this was really helpful. If i were to put down 3% for option money, it might be better to put down 3.5% with an FHA loan, live in it for a year and then turn it into a conventional mortgage. I will keep this in the back of my head.
Quote from @Pedro Hernandez:
I actually warn Sellers to avoid rent-to-own or lease-option deals. Why? Because buyers attempting this method are usually high risk. They don't have the capital for a downpayment, they have bad credit and can't qualify for a loan, etc. In my experience, over 80% of these deals never result in a sale and the Seller ends up losing money.
If you're serious about buying something, get your finances in order, save some money, and qualify for a loan. It's the same principal as buying with cash instead of credit: if you're truly committed, you'll save up and make it happen. If you try to use shortcuts, you're more likely to fail.
Quote from @Nathan Gesner:
Quote from @Pedro Hernandez:
I actually warn Sellers to avoid rent-to-own or lease-option deals. Why? Because buyers attempting this method are usually high risk. They don't have the capital for a downpayment, they have bad credit and can't qualify for a loan, etc. In my experience, over 80% of these deals never result in a sale and the Seller ends up losing money.
If you're serious about buying something, get your finances in order, save some money, and qualify for a loan. It's the same principal as buying with cash instead of credit: if you're truly committed, you'll save up and make it happen. If you try to use shortcuts, you're more likely to fail.
I have to disagree with such a blanket statement, however there's some truth there and I agree with the warning. Very few homeowners would know how to properly set up and structure such a deal, let alone handle it all the way through to completion. Actually, some very unethical ones would set up buyers for failure to keep profiting on the turnover. So the key here is to make these deals with the right investors. It's the same with any other real estate professionals, agents and brokers, attorneys, mortgage brokers, contractors, anyone in the industry. More recently, a large influx of rookie investors have poured into real estate for several reasons, and they are at high risk of screwing up everybody, themselves too, not intentionally, just because they "learned" too quickly and don't have the necessary expertise. If you're a broker, as it appears, I'm not surprised by your statement because you generally are well versed in traditional transactions, but not in any other alternative type of deal, so you're not alone, probably 95% of agents can't assist with these deals, in my experience. However, some take the time and make the effort to understand what we need and we do great business with very very few brokers and agents, who understand the nuances, not just the concept and the implementation. If you are definitely closed to these deals, that's totally OK, as I said, it's normal. If you're open to understanding more of how I/we operate, we can chat and maybe find common ground. I'm very disappointed that some ruin it for so many, investors, sellers, buyers and yes, brokers as well because they lose business and can't assist their clients in the best possible way, which is what it's all about. Apologies for the long reply.
Quote from @Nate Sanow:
I don’t love the rent to own concept for a buyer as it is often structured as a way to help the seller “sell” to a few renters and recoup all deposits etc multiple times… a lease option or a contract for deed - if your state has those - are a little cleaner and simpler.
What is the difference between a "rent to own" and a "lease option"?
Quote from @Lindsey Johnson:
Quote from @Nate Sanow:
I don’t love the rent to own concept for a buyer as it is often structured as a way to help the seller “sell” to a few renters and recoup all deposits etc multiple times… a lease option or a contract for deed - if your state has those - are a little cleaner and simpler.
What is the difference between a "rent to own" and a "lease option"?
@Lindsey Johnson rent to own is where monthly rent will eventually mean a tenant owns a home, 30 years later. Sounds good but gets choppy if they decide to “sell” because they don’t really own it, and are upset…no one stays anywhere 30 years anymore. And there are, unfortunately, sellers / investors who prey upon this.
A lease option: an “option” to buy something is paid for, for let’s say $1,000 or $5,000. It allows the tenant a year or two to get their finances in order to buy the house. But they are still a tenant and they should know that, because there isn’t any language for ownership. Only for the “option” to buy it in a year.
@Nate Sanow great explanation, thanks man!
@Lindsey Johnson and @Nate Sanow - close. The difference between "rent to own" and lease option is just the name. One doesn't mean you are leasing for 30 years. At least, not if you're doing it right. I've never lease optioned to sell or acquire properties for more than 3.5 years. The term "rent to own" is a way to market to a tenant buyer. Lease option or lease purchase just doesn't have the same ring to it;)
You are literally leasing to a tenant buyer with the exclusive option to purchase the same property. This tenant buyer understands that you are helping them get their credit and work history in order so they can bring in a new loan. Otherwise you are making it way too complicated and depending on other terms (option payment, length of option, amount of rent credit, end purchase price) you are opening your self up to a bunch of scrutiny - ethically and legally. Keep it simple. :)
Quote from @Shiela R.:
@Lindsey Johnson and @Nate Sanow - close. The difference between "rent to own" and lease option is just the name. One doesn't mean you are leasing for 30 years. At least, not if you're doing it right. I've never lease optioned to sell or acquire properties for more than 3.5 years. The term "rent to own" is a way to market to a tenant buyer. Lease option or lease purchase just doesn't have the same ring to it;)
You are literally leasing to a tenant buyer with the exclusive option to purchase the same property. This tenant buyer understands that you are helping them get their credit and work history in order so they can bring in a new loan. Otherwise you are making it way too complicated and depending on other terms (option payment, length of option, amount of rent credit, end purchase price) you are opening your self up to a bunch of scrutiny - ethically and legally. Keep it simple. :)
@Shiela R. I have known people whom have had to go through the foreclosure process due to using rent to own language in the structure, and not clarifying if it is a type of owner carry VS a lease option. Correct me if I am wrong but a ton of rent to own's are done in an owner carry type manner...which is where it seems most the pain comes. I guess I could have spelled that out, but to me and from what I know, it is vastly different than a lease option. A lease option is as simple as normal tenancy. All of this could be state by state and my experience here is finite and indirect, I'll admit.
Hi @Nate Sanow, it's my understanding that if someone has to foreclose with a lease option agreement, they accepted way too much option money (more than 3% of the end purchase price). In that case, I tenant buyer would have equitable interest. And, yes, the owner of record would need to foreclose to gain back control of the property. However, there is no good reason to get into this situation.
A lease is simply a lease - monthly payments for a term IE. 12 months. There is no claim or agreement of ownership, future or otherwise.
A lease option is normal tenancy plus an exclusive agreement (the option agreement) to buy at a specific price within a specific time. The option agreement is the exclusive right (but not the obligation) to buy or own in the future. The deed only transfers to a TB when they bring in new financing. A seller who lease options his/her house cannot sell it to someone other than the tenant buyer with the agreement whom they have the option agreement. Hence, it's exclusive.
Owner carry is the same as seller financing. It is a sale. Owner carry is not a lease option. The seller is carrying the note but the buyer gets the deed as in any other sale. Shame on someone who advertises "rent to own" but means seller financing. That is not the same. They should advertise as OWC (Owner Will Carry). SMH. AND if they should have to foreclose bc they are the lender not the owner.
Yes, it is state to state. I've only heard of Texas having an issue with an option agreement longer than a certain length of time (IE. 6 months). But OWC is not LO. Okay, off the soapbox. :)
Quote from @Shiela R.:
Hi @Nate Sanow, it's my understanding that if someone has to foreclose with a lease option agreement, they accepted way too much option money (more than 3% of the end purchase price). In that case, I tenant buyer would have equitable interest. And, yes, the owner of record would need to foreclose to gain back control of the property. However, there is no good reason to get into this situation.
A lease is simply a lease - monthly payments for a term IE. 12 months. There is no claim or agreement of ownership, future or otherwise.
A lease option is normal tenancy plus an exclusive agreement (the option agreement) to buy at a specific price within a specific time. The option agreement is the exclusive right (but not the obligation) to buy or own in the future. The deed only transfers to a TB when they bring in new financing. A seller who lease options his/her house cannot sell it to someone other than the tenant buyer with the agreement whom they have the option agreement. Hence, it's exclusive.
Owner carry is the same as seller financing. It is a sale. Owner carry is not a lease option. The seller is carrying the note but the buyer gets the deed as in any other sale. Shame on someone who advertises "rent to own" but means seller financing. That is not the same. They should advertise as OWC (Owner Will Carry). SMH. AND if they should have to foreclose bc they are the lender not the owner.
Yes, it is state to state. I've only heard of Texas having an issue with an option agreement longer than a certain length of time (IE. 6 months). But OWC is not LO. Okay, off the soapbox. :)
Gotcha. You clearly know a lot about it, way more than I do. And yes that’s an important nuance (the deceitful tactics) and really is my actual issue with how many people do it.
Sure thing @Nate Sanow. I see. I take issue with deceitful tactics too. I was taught and practice creative financing with integrity.
I think it's important to have these conversations to raise awareness on what is what. Thank you for your candor :)