Tenants want to Rent-to-Own
My tenants want to rent-to-own the property they are currently renting. Unfortunately they are under the impression that the property is worth a lot less than it really is, although I've told them the actual value. If I agree to do rent-to-own, can I simply let them put a portion of their rent towards a deposit for a couple years and then let them buy it at market value at the time (based on an appraisal)? Or does a selling price need to be worked out ahead of time? What happens if after the given amount of time they decide they don't want to buy it or can't get financing - can I keep the portion of rent that would have gone to the downpayment? How do these things usually work?
Hi Lilac,
What you would be looking to do is a "Lease with an Option to Purchase". Yes you would let them put any amount you would like of the rent income towards the down payment/equity of the property. I personally would not allow more that half, at the most, (maybe 25%) I'm sure some other people here have their own formula.
Yes you would have to set the price of the home upfront in the Agreement. The beauty of this agreement is it is a Lease, until they exercise their Option to Purchase. So if they walk away they forfeit all moneys paid. They are renting until then.
When they exercise their Option to Purchase, it can be treated as if is a refinance. They must have a minimum of 12 months in the property, and must show 12 months of cancelled checks for their payments. They had better not be late either. The lender will look at the dates.
At the time they apply for financing, all the typical things will happen including a appraisal.
I hope this is helpful
Wayne
You can either work out a price ahead of time or figure out the price later. Better, IMHO to figure it out now. That avoids nasty arguments later.
I would allow only a small portion of the rent toward the down payment. Allowing too much increases the likelihood of a judge deciding they have an equitable interest in the property.
You should also get a option fee when you agree to do this. 3% is pretty typical.
If they walk away you would be within your right to keep the option money (that is the price for the option) and all the rent.
I had a RE investor tell me that he sets the purchase price as follows:
The purchase price will be for the appraised value at the time the option to purchase is exercised, but will never be less than the FMV of the property at the time the very first lease is signed.