How rent to own works?

Question

Hello folks,

can you explain rent to own with an example?

Nathan Gesner · Answer

Rather than type for 15 minutes, I'll share this article.

Rent-to-own or lease-options fail over 80% of the time. The reason buyers use rent-to-own is because they can't qualify with a bank. They can't qualify with a bank because they are high risk. Why would any seller want to lock in a contract with someone that's high risk?

If you are a buyer and can get someone to take the risk, good on you. If you are a seller and someone is trying to talk you into a rent-to-own, walk away. Or...figure out how to mitigate the risk. There are ways to mitigate the risk and turn a rent-to-own into a real profit center but you have to know what you're doing and have a solid contract.

Nathan Gesner · Answer

I just read your post again. There's nothing there to indicate it's a hypothetical.

If I were in your situation, hypothetically speaking, I would put that money somewhere safe while educating yourself on real estate investing. It sounds like you're missing the basics and you're asking complete strangers from other parts of the country on how best to invest $700,000 in Orlando.

That's hypothetically foolish.

Account Closed · Answer

That was a hypothetical scenario. How would you invest $ 700k cash in real estate in my market (Orlando,FL)? I already have a remodeled house worth close to 400k, it is located in a very decent area of Orlando, so the appreciation is noticeable, but the rental ROI is about 4 percent (low). How would you invest in my situation ?

Account Closed · Answer

thank you.

Account Closed · Answer

I am a seller. I own it out right. I believe the housing market is going to slow in a year or two and I plan on renting my house, I think it is highly likely that the buyer won't buy the house as the result of any noticeable drop in the value of the property in a year or two. Thus, I collect more rent  and keep the house in this scenario (considering the 3.5 % down + a monthly credit). Even if the buyer decide to buy it, I won't lose any money since my selling price would be higher considering the 12% appreciation in value for a two year contract.

What do you think?

Nathan Gesner · Answer

I think it's a mistake.

If this is a $200,000 home and you require 3.5% down, that's $7,000.

Tenant lives there for two years and fails to buy. He also fails to make two payments and you have to evict ($3,000+). Once you get the home back, you discover he tore out your carpet and replaced it with Pergo flooring that was installed improperly and has been damaged by water and animals ($6,000). The entire house reeks of dogs and cats, walls need to be painted $1,500), a couple doors and windows have to be replaced ($2,000), the sprinkler system is broke and the yard is full of weeds and dirt ($2,000). And the house will sit empty for at least two months while you try to get it back in shape ($3,000)

Without even trying, this occupant has cost you $18,000 in unpaid rent, vacancy, cleaning and repairs. The scenario I'm painting is not exaggerated. I haven't seen many rent-to-own situations personally but the ones I have seen and the ones I've heard about have a strong tendency to go this way. Also, the tenant will most likely bail when the market takes a turn for the worse so you'll have a hard time getting top dollar for it after they leave and you fix it up.

I would only consider a rent-to-own with a significant, non-refundable option of 10%. Even then, I would make the entire deal contingent on them maintaining the home in good condition and subject to your inspections.

I don't think you have the experience and knowledge necessary to ensure you're protected so I recommend you reject the offer.

Ed Emmons · Answer

A portion of each months rent goes toward down payment or purchase price of the property. There are many other things that can be negotiated like what portion, how long of a term, who is responsible for repairs, taxes, etc. You do want to have the agreement in writing and make sure landlord has free and clear title and is the sole owner has legal right to make the agreement. The renter/buyer needs to keep all his rent payments showing potentially a bank that payments were made on time and how much has actually gone toward purchase.

How rent to own works?

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