Potential tenant was to Rent to Own

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Potential tenant was to Rent to Own

Eric Mcginn
Real Estate Investor · Chico, CA · Member since 2016 · 248 posts · 105 votes

I have this great clean little 1bd 1ba SFH I'm closing on a nice street in a so-so neighborhood in a very expensive county. It's the most affordable house in the county at the moment to my knowledge and I've placed an ad for a reasonable rent which is receiving lots of interest.

I have several excellent options for potential tenants lined up. 
One of which is interested in a “rent to own” situation. Their income more than qualifies them as tenants but they are young with limited credit. 

I was surprised by this inquiry and hadn’t considered it before. 

What are the pros/cons? 

Purchase price is $140k. Rent is set at $1500 with tenant paying all utilities. 


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Ashley Noethe
Real Estate Agent · Indianola, IA · Member since 2019 · 43 posts · 44 votes
5y

As many have said, it all depends how you structure the agreement, that will make or break whether it makes sense. Often times a nonrefundable down payment is collected which holds the buyer more accountable to their word. Generally, the buyer is also responsible for maintenance. In terms of appreciation, you can account for that in your final purchase price in the contract. Lots of options. We are doing a lease to own with a property we recently finished renovating - we collected a $500 application fee and will be collecting a $10,000 down payment. You would be surprised how many different situations there are that put people in a scenario where they need to lease to own for a while before obtaining a loan - it is not necessarily just people who are financially irresponsible. The biggest thing to consider is if you are up for taking the proceeds a few years down the road and having to find a new property to invest in rather than sitting on this one for longer. If that tenant backs out of the option and moves out, you then replace him/her with a new tenant and are in the same boat as you would have been doing a long-term rental anyway.

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  • Bjorn AhlbladPro Member
    Investor · Shelton, WA · Member since 2017 · 6k+ posts · 6k+ votes
    5y

    @Eric Mcginn I get that frequently in my market.........in fact I have a tenant inquiring about that right now. What are/were your objectives buying the place originally? Mine did not include selling or 'rent to sell/own'; so I don't even think about it.

    2Reply
  • Eric Mcginn
    OP
    Real Estate Investor · Chico, CA · Member since 2016 · 248 posts · 105 votes
    5y
    Originally posted by @Bjorn Ahlblad:

    @Eric Mcginn I get that frequently in my market.........in fact I have a tenant inquiring about that right now. What are/were your objectives buying the place originally? Mine did not include selling or 'rent to sell/own'; so I don't even think about it.

    Right, same here. My goal is actually to buy it using as much equity in my complicated property that only the local credit union will lend on so that I have my equity in this simply SFH instead which will make it more liquid / accessible. Plus cash flow a bit

    1Reply
  • Eric Mcginn
    OP
    Real Estate Investor · Chico, CA · Member since 2016 · 248 posts · 105 votes
    5y

    just not sure if there’s some sort of benefit I hadn’t considered 

    0Reply
  • Nathan GesnerBusiness Member
    Moderator
    Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
    5y

    Why? Is your investment so weak that you'll consider unloading it just because someone asks? You should really evaluate your situation and determine if this is a good investment and whether it meets your goals or not. If you sell the property, you will have cash in hand that has to be invested somewhere else before it's squandered. We're in a peak market where good cash-flowing properties are hard to find. So why get rid of a winner and take the risk of buying something that won't provide the same return?

    Also, the majority of rent-to-own situations fail. Why? Because the buyer isn't financially responsible, which is why banks won't loan to them. If the banks - with all their resources - refuses to loan to them, why would you? 

    Another issue: you offer to sell it to them for $140,000 in the next two years. What if the market keeps going up and the property is suddenly worth $180,000? You're contractually obligated to sell it to them for the lower price and you'll lose $40,000. But it doesn't matter because 80 - 90% of the buyers never manage to purchase so you're really just wasting your time and exposing yourself to new risks due to your lack of experience.

    Rent it to a qualified renter. If you're serious about selling it, put it on the open market where people can compete. Sell it outright without all the risk and delays. But if you're going to sell it, make sure it's part of your plan and not just because the market's hot and someone's offering.

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  • Eric Mcginn
    OP
    Real Estate Investor · Chico, CA · Member since 2016 · 248 posts · 105 votes
    5y

    Why is exactly what I’m asking. Thanks for your detailed response. I’m literally just not familiar with the concept beyond the basics and wanted to ask y’all if there was a way to use it to my benefit somehow. 

    But it seems not! I haven’t even replied to this inquiry so it’s not something I’m really interested in or even responded too, especially after your take on it. I’ll continue with my other most qualified tenants instead! 
    Thanks! 

    0Reply
  • Eric Mcginn
    OP
    Real Estate Investor · Chico, CA · Member since 2016 · 248 posts · 105 votes
    5y

    As for this investment being weak / strong....

    All my expenses will be about $1,100 monthly (mortgage, insurance, taxes) based on property and house details I expect minimal maintenance after I install a heat pump to avoid fiddling with the kerosene monitors, and I have got close to 100 inquiries for the listing at $1,500. 
    Southern Maine is a super hot market right now so I expect the price will go up over the next couple years. 
    so maybe not the strongest deal but pretty solid I think. 


    0Reply
  • John Teachout
    Rental Property Investor · Concord, GA · Member since 2015 · 3k+ posts · 3k+ votes
    5y

    The advantage of "rent to own" is that typically you're selling them an option to buy the property that they can choose to exercise or not. As mentioned above, these rarely result in a sale so you pocket the option fee (several thousand dollars) and in the meantime, the property is rented out. If that person leaves, you can do it over again and some people use this as their model. I think it's marginally ethical even though it's legal. The Dodd/Frank act has some influence on this process and it varies by state so make sure to know your local law if you move in this direction. We get asked this as well and just say no.

    1Reply
  • Shiloh LundahlPro Member
    Rental Property Investor · Gilbert, AZ · Member since 2016 · 3k+ posts · 4k+ votes
    5y

    @Eric Mcginn Most of our single family homes are “rent to own.” Really they are lease options. We have the tenant pay on option fee of between 3k and 5k usually and then they have the ability to buy the property from us within a specified period of time. Usually 3 years. They take care of all of the maintenance of the property and the management is very low. We usually increase the purchase price by 7% - 10% to adjust for inflation and we charge a premium rent (usually $100 more than market rent). Doing it this way allows for us to scale quite easily because the property generally takes very little to manage and when we go to sell it, the buyer pays for the closing costs and there are no realtor fees so we get a good price for the property.

    When you do the math, over the time of owning the property, your return actually goes down when you look at what your return on equity is producing. So after 3 - 7 years is a great time to sell or trade up the property for something else (or refinance the property to suck the equity out). I made a video specifically analyzing whether to keep or sell a rental property where I discuss this exact thing.

    Recently we did a lease option where we didn’t set the option purchase price but we said that at the time of purchase (anywhere between now and 3 years) we would put their option fee towards the purchase if they exercised the option and we would sell them the house for the market value as long as it was over 240k. This makes it so we aren’t losing out on so much appreciation. Another option would be to do seller financing if they can come up with a good size down payment and you can wrap the mortgage.

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  • Ian WalshBusiness Member
    Lender · Philadelphia, PA · Member since 2016 · 2k+ posts · 1k+ votes
    5y

    Rent to own has really just ended as glorified landlording in my experience.  I am sure there are others that have high conversion rates and do it differently then when I had experience with it.

    0Reply
  • Ed Emmons
    Specialist · Milford, ME · Member since 2016 · 630 posts · 378 votes
    5y

    @Shiloh Lundahl comments are good and I agree with his approach. We have sold many on rent to own that were not convenient for us to do the maintenance on them so as part of their lease agreement is that they take care of maintenance. You can also make it so that a portion of their rent amount goes towards buying the property not the entire rent and make out better that way as well. You can structure it anyway you want to and that’s the beauty of it.

    2Reply
  • Dan Maciejewski
    Realtor · PInellas County Largo, FL · Member since 2016 · 902 posts · 810 votes
    5y

    I would not do a lease option in an appreciating market.  I also wouldn't seller finance because either way you're locking yourself in to what is almost guaranteed to be a lower price than you could get on an open market sale in a few years.

    If you bought it as a rental and want to keep it, you should rent it out and not sell it until it's your idea.  

    0Reply
  • Ashley Noethe
    Real Estate Agent · Indianola, IA · Member since 2019 · 43 posts · 44 votes
    5y

    As many have said, it all depends how you structure the agreement, that will make or break whether it makes sense. Often times a nonrefundable down payment is collected which holds the buyer more accountable to their word. Generally, the buyer is also responsible for maintenance. In terms of appreciation, you can account for that in your final purchase price in the contract. Lots of options. We are doing a lease to own with a property we recently finished renovating - we collected a $500 application fee and will be collecting a $10,000 down payment. You would be surprised how many different situations there are that put people in a scenario where they need to lease to own for a while before obtaining a loan - it is not necessarily just people who are financially irresponsible. The biggest thing to consider is if you are up for taking the proceeds a few years down the road and having to find a new property to invest in rather than sitting on this one for longer. If that tenant backs out of the option and moves out, you then replace him/her with a new tenant and are in the same boat as you would have been doing a long-term rental anyway.

    3Reply
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