How to do rent to own

Question

I have a tenant that has been in a property for about 5 years now and they are asking about signing the next contract for 5 years with a rent to own option. I am looking for any input on how to structure this deal and make both sides feel comfortable with the amounts. I still want to get good value out of the house.

John Lubin · Answer

I was having trouble selling a flip, so I just put a rent-to-own tenant in, which I got through listing on FB marketplace.  It was win-win. I get more cash upfront, cashflow after my cash-out refi, and I net more on the sale because no realtors involved.

Young family that the husband started a business 1yr ago so couldn't qualify for a mortgage, but they wanted to buy a home.

-I gave them a 3yr option to buy at anytime

-purchase price increases 1.5% every 6 months

-They put $10k down (non-refundable) that will go towards their purchase

-They pay $1850 in rent.  And an additional $600/m for 1yr and $200/m for yr 2-3 that goes towards purchase (non-refundable).  The additional amount in yr 1 was to help decrease the initial downpayment

-Tenant responsible for all maintenance (but I did purchase them a home warranty to use)

Bill B. · Answer

If the value goes way up in 5 years you lose. If the value goes down the tenant doesn’t buy or renegotiates and you lose.

I think rent to own is usually done by landlords who don’t want to sell and just want to keep a large option payment.

The way I’ve always seen it explained:  You add 5 years of inflation to the current value, say 25%. Then you ask for 10% of that amount as an option payment for the right to buy the property in 5 years. And then you assume they don’t and keep their 10%.

You have to make sure they don’t gain any equitable rights. Or you can’t do a 1031 in the future and they have new rights as owners. Also read up on Dodd-frank and revisions and I think rent to own was one of its targets.

Nicholas L. · Answer

@Jess Hammersley

why do you want to sell?

Jephte Augustin · Answer

Ok thanks!

John Lubin · Answer

It is all non-refundable, so I am not putting it in escrow.

The contract clearly states the amount that goes towards the purchase, so once the execute the PA it will be easy to know the amount that was paid toward rent vs purchase.

Jephte Augustin · Answer

How does this work from a tracking perspective?

1) Do you put the extra rent and deposit in escrow?

2) Do you provide a statement to the person informing them of the amount they have paid toward their deposit on a monthly basis?

I'm interested in doing that for a property we just renovated and I'm curious on how to proceed, especially if the tenant decides to exercise their right to buy.

THanks

Donald Hajdari · Answer

Saw that but it was not very imformative on how to do it.

Jess Hammersley, I would contact your motrgage broker/ RE attorney and get the info and paperwork from them

Chris Furry · Answer

They just did a podcast on a couple that does this on the Real Estate Rookie podcast.  You should check it out.  It was very informative and I want to try it in the future if I can find the right deal.  Very lucrative for them.

How to do rent to own

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