question about rent to own ?

Question

We have a renter now that originally was a rent to own. Due to his inablility to sell his house in CA, he is going through a forclosure which means of course it will be years until he can get another house loan. He wants to pay our entire mortgage on that house with the following provisions: He takes full responsibility for any unkeep or repairs allieviating the landlord duties for us, then when he is finally ready to buy he wants to pay the amount that is left on the loan so he actually acquires the equity. It might be good since we cant sell the house and already bought another one, but we are unsure of the "dangers" of agreeing to do it. The house payment is actually $600 more than his rent so he will be putting out much more money each month, and we won't have to make up the difference. seems like a good deal for all, but I'm not an expert on this kind of thing. Anyone have any ideas or advice before we put this thing in writing?

Michael Rossi · Answer

This is not a good deal from a business standpoint.  If this is your old personal residence that you simply can't sell, then it MAY be the best you can do.

The purpose of owning rental property is to make money.  Obviously that is not the case with this property.  In the rental property business, we typically make money through positive cash flow.  Some people buy rentals speculating on appreciation.  In this proposed situation, you would have neither positive cash flow nor appreciation (since the "buyer" would get that).   So, is this a good deal?  No.  Is it the best you can do?  Maybe.

BTW, you need to check your state and local tenant-landlord law.  In most states, it is ILLEGAL to require the tenant to do the maintenance.  Even if you do require it, you may be responsible if the tenant gets hurt doing the maintenance.  In addition, the tenant may not do the maintenance correctly and you may end up with a bunch of deferred maintenance.  Finally, the tenant may do the maintenance wrong and cause a fire burning your house down (which may or may not be covered by the insurance).

In addition, how about all the other expenses associated with rentals?  Who is paying the taxes and insurance?  What happens if taxes and insurance go up?  In any case, be sure that the tenant pays the taxes and insurance to you and that YOU make these payments directly.  You don't want the tenant saying that they are paying these expenses but not really doing so.

Good Luck,

Mike