How to analyze a rent to own purchase?

[Huiping S.]

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

[Nuhan Demirkan]

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.