Rent to Own-How to structure
I am selling a SFH that is currently under contract. It is contingent on the sale of the buyers house. I have been informed that the home that is being sold might not sell for a couple months. Instead of letting the deal fall thru, I am contemplating doing a Rent to Own structure to the buyer. I am new to this type of deal and am looking for advice on how it should be structured to protect my best interest and still have the deal go through. Thank you!
Is this your personal residence or a rental home? You should google ILLINOIS SAFE ACT EXEMPTIONS to see if you will be required to hire a licensed mortgage loan originator to be involved in the transaction. If this is just a one-off situation and not a normal course of business, meaning you don't do more than three of these in any twelve months, you will be exempt from federal Dodd-Frank and Truth in Lending laws related to disclosure paperwork and also due diligence to make sure they can really afford to finance the house with you.
Rent to own structures are not favored by some states and courts, and might be treated as equitable mortgages in Illinois. I don't know how they view that. Most people have better luck doing a lease with a purchase option. You make the buyer/tenant pay an upfront amount to buy the option. If you were willing to sell the house for $100,000, you might sell them an option for $5,000 and let them buy the house within six calendar months for $95,000. This is a little tricky, but you can't treat the $5,000 as if it is earnest money or a down payment. It is the purchase price for the option. If they don't buy the house, they lose the $5,000. If they do buy it, the price is $95,000.
This structure avoids all of the seller financing legal pitfalls in most states, including SAFE Act, Dodd-Frank, Truth in Lending, etc. As a bonus, the option payment amount is not taxable in the year of receipt. If the buyer goes through with the purchase, then at THAT time the $5,000 is treated for tax purposes as if it were part of the sales price, which means long term capital gains or even total exclusion if you are selling your personal residence. If the buyer defaults and does not buy, then in THAT tax year (of default) it is treated as ordinary income. In other words, you can get the $5,000 in 2017 but not owe any taxes until you file your 2018 tax return.
