Rent to own experience?

Question

Hi All,

Does anyone have experience with structuring a rent to own deal? I am looking at purchasing a property for my cousin for her and her family to rent while they rebuild their credit. Goal would be for me to purchase it now. Rent it to them for a few months, then sell it to them.

Appreciate any thoughts / guidance here.

Thanks!

Regards,

Ryan

David M. · Answer

@Ryan A Rodriguez-Wiggins

Working with family in this case is certainly a double-edged sword.  On one hand, if the deal goes sour usually so does the relationship.  On the other hand, you COULD work out a less formal deal --- based on trust.  I agree with @Michael Carbonare:  specify the lease terms and the purchase terms.

In one deal I did, we agree upon the purchase price, lease amount, and a nonrefundable deposit towards the purchase.  We signed a 1 year lease with the understanding that when the tenant/buyer closed within the timeframe, the lease would end with no penalty.  In short, I used my standard lease and we didn't bother to include any language since it was a "no-brainer" (yup, could be famous last words..).  Again, with a more "trusting relationship," we signed a purchase agreement after qualified to buy...

So, you could do something like that with family if you want to base it more on trust.  Or, you'd have to have a lease and a purchase contract all signed up front.  I didn't do that since having a purchase contract in effect for better part of year especially when we weren't sure when they would qualify seemed "stupid."  But, you said a couple months so it would make sense to proceed immediately.  That being said, 2-3 months is a pretty short timeframe so just make sure you can close that short of a timeframe.

Good luck.

Michael Carbonare · Answer

The typical setup with a Rent To Own requires a lease agreement between you as the homeowner and the tenant/buyer, and a separate option to purchase agreement.  The terms are spelled out, of course, specifying the length of the lease option, the monthly rent, the option price, and the nonrefundable option money you receive upfront.  It's more involved than that, of course, but that is a simplified explanation.  You can also set the deal up as a sandwich lease wherein you lease the property initially rather than purchasing it, and you then sublet it to a tenant/buyer.  Your meat in the deal comes from the spread between the terms you negotiated with the homeowner and the terms you negotiated with the tenant/buyer.

Ryan A Rodriguez-Wiggins · Answer

Thanks @Steve Vaughan! Super helpful, will reach out on that forum. Wasn't sure the best place to post this question.

Re: Digital Nomads - basically means we plan to be working remotely from the road moving around city to city while we still can before our jobs ask us to go back into the office :-)

Yeah, I think we can probably work out something similar where we split the cost and definitely avoid realtors.

Ryan A Rodriguez-Wiggins · Answer

@David M. - got it. Yeah I think we are on the same page. Just like a simple document that outlines the deposit upfront and sale agreement. Thanks!

David M. · Answer

@Ryan A Rodriguez-Wiggins

Might just be me... but not sure what you need/get with an option template.

I didn't mention that we signed a "piece of paper" upfront where all it said was we agreed to purchase/sell the property for a specific amount and that so much money was paid as a nonrefundable deposit towards the said purchase.  Put a sunset timeframe on it and, in my layman's opinion, you have the primary elements.

This is where I am saying you can either deal with the major elements, or hash it out to death legally.  Good luck.

Ryan A Rodriguez-Wiggins · Answer

@David M. and @Michael Carbonare - super helpful! Thanks for the additional detail. This makes sense. I'll leverage my standard lease agreement and look at purchase option templates online. I'll build in a buffer/ spread for the costs and risk, and then I think we should be okay.

Ryan A Rodriguez-Wiggins · Answer

Thanks! @Michael Carbonare - that's great to hear re: 100s of lease options. Any resources you can point me to or suggest that I review in terms of structure?

Yeah I hear you on family and business. Generally try to avoid that as well. That being said, likely going to do so anyway as I feel pretty confident about being able to make it work. Just trying to structure it in the best way to minimize the aforementioned risk.

Let's assume it wasn't my cousin. What's the best way you'd recommend structuring the deal?

Thanks again!

Michael Carbonare · Answer

@Ryan A Rodriguez-Wiggins  I've done hundreds of lease options over my 28 years in real estate.  Done correctly they can be a safe strategy with minimal cash requirements.  But the bigger issue in this deal, at least for me, is that you are involving business and family, often a recipe for disaster.  Should an unexpected financial issue arise, guess who will be at the bottom of the list to pay that month. . .good ol' cousin Ryan.

Steve Vaughan · Answer

I see.  Being in the starting out forum threw me off I guess.  There is a forum more specific to lease options.

Not sure what a digital nomads is, but good luck selling.

I wrote a Lease Option this month.  My tenant buyers are splitting the closing costs with me in addition to paying full retail and not having agents involved.  Our state charges transfer fees, so no way around that.

I'd be hesitant to buy for someone that can't qualify.  Make sure you're well capitalized.  I'd recommend they just rent or stay put while their credit recovers.   Everybody selling with no plan going forward.

Ryan A Rodriguez-Wiggins · Answer

Thanks @Steve Vaughan! I wouldn't say I am new to real estate, just the rent to own structure. This would be my 5th property.

The back up plan is actually for us to move in, since we are currently selling our apartment and plan to be digital nomads for a bit. They are also selling their current place, so will have a decent chunk of change once that closes.

The high cost around closing are my biggest concern. Any suggestions...?

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