Investor · Maumelle, AR · Member since 2015 · 25 posts · 9 votes
So after our first rehab sitting on the market for about 4 months, we have some interest in a Lease to own scenario. I'm a little nervous, as I've heard that there are quite a bit of legalities tied to it. They brought up terms that seem a little unusual to me. $5,000 deposit- one year lease with option to purchase. If he doesn't buy by end of year, forfeits deposit. If he does buy, deposit and rent both go towards purchase. Does anyone have any advice regarding the legalities of a lease to own, or just in general? A year seems a little short to me. If he's another investor looking to sandwich, he'd make that known, right?
These are not that uncommon, particularly in commercial developments, but you will want your legal counsel to review the proposed contract. The lease will need to discuss financing and how the rental payments are allocated re: interest/principal. He's not under any duty to disclose his intentions (if there are any) that I'm aware of.
These are not that uncommon, particularly in commercial developments, but you will want your legal counsel to review the proposed contract. The lease will need to discuss financing and how the rental payments are allocated re: interest/principal. He's not under any duty to disclose his intentions (if there are any) that I'm aware of.
I think 1 - 3 years is pretty standard. Although from my understanding rent does not usually go toward the cost of the property. Usually rent goes to you, and sometimes people offer "rent credits" where the renter will pay maybe $25 more and get $50 toward the deposit every month. This makes it easier for them to qualify for a loan in the end and if they end up not buying you get extra cashflow.
My question is that if another investor is looking to "sandwitch" by renting to own, sub-letting it out, and then buying at the end of the year for last year's price, why do you care? You still get whatever price you agreed to, you just don't get all the money up front. Make sure the price you agree to reflects that, and if it's agreeable to both parties, what's the risk? Of course, if you really don't like that idea just make sure subletting is against the lease and if they sublet they forfeit their option to purchase and you keep the deposit.
In the end you need to consult with an attorney regardless. Keep in mind your goals and make sure any potential deals (legally) meet them.
Any time you have something like "rent going toward the purchase price", you may run into issues where that rent credit actually gives the tenant an equitable interest in the property. It can also subject you to being considered in the same light as a mortgagee, which would carry with it a host of legal requirements that you need to adhere to. This type of transaction crosses over from a "simple transaction" into something more complicated, so you'll need to run the whole thing by an attorney.
***This post is not intended to create any type of attorney client relationship. It is general information only.***