How to analyze a rent to own purchase?

5 Replies

One person I know wants I buy a home and he and his family rent to own it. His situation: credit score 640 has a full time job and very handy but no enough savings for down payment. Never did this before. Where to find this information and how to know it is a right investment for me? Appreciate experienced investors to share your valuable knowledge! Huiping

Have you tried to get him pre approved for a loan?

Write a purchase contract that needs to be executed at a certain time in the future. Specify a non-refundable down payment that will be paid monthly over a period of time. The purchaser must exercise the purchase option at the end of that time period. You can put in reasonable annual purchase price accelerator. If the purchaser does not exercise the option they lose the deposit.

Write a lease for the same time period as the purchase option. They pay you rent plus the monthly down payment amount. None of the rent goes towards the purchase. Only the down payment amount does. If they miss the rent you can evict and they will lose the purchase option along with the down payment. If they can't buy the house at the end of the time period, you can extend, you can ask for more down payment or you can cancel the agreement. 

I heard on a BP podcast that rent-to-own requires compliance with Dodd-Frank. Better check with an attorney to make sure you do it right if you choose to go this route.

there are different items that people call in rent to own: 1) rent with option,  where you buy a home all at your costs then rent to him, the down payment is negotiable and works like any escrow deposit with terms you both agree to , both contract are separate(rent,sale option), basically locking in sale ahead of time, 2) rent to own is usually part of the rent gets credited to the sale, rent must be within a market value, say rent is $800 and 300 goes toward sale, both these require buyer to get their own mortgage within a time frame, say 5 years to perform 3) is owner seller financing which is what it sounds like they want, if you are specifically buying a home with them in mind to pay you back a set rate each month, not a home you already have for sale       each way has pluses and minuses,  dodd-frank depends on how many you do each year and how it is set up,  the first two you are their landlord(maintenance on you), the third you are their financier, decide which idea you like better and check with your attorney which puts you in less liability,    another option might be a loan for the deposit on his purchase as a lien on house, but be careful of money between friends or family, make sure no misunderstanding put it in writing

Originally posted by @Jeshua Patrick :

I heard on a BP podcast that rent-to-own requires compliance with Dodd-Frank. Better check with an attorney to make sure you do it right if you choose to go this route.

Doing it the way Nuhan described above, shouldn't fall foul of Dodd-Frank. Also, even if you "Seller-finance" from day one (bypassing Lease-with-option altogether), so long as the repayments amortization is in line with normal banking practice/interest-rates, there shouldn't be any Dodd-Frank issue either, afaik. [Please respond if I'm in error]. My 2c...

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