Thinking about selling house on "rent to own"

10 Replies

I have about 44k tied up in this house. Own it out right, remodeled everything. The house is maybe worth 55k on the open market. Would rent for around $900 monthly.

How exactly does "rent to own" work? As I understand it I list the house for over market value? So around 60-65k purchase price. Then 5-10k down payment, $900 per month with 150 per month of it going toward principle pay down, balance due at end of 3 years.?

I the seller am responsible for property tax/insurance. They the buyer are responsible for repairs.

is that how it works?

@Mike Wallace  would you buy an underwater deal?  Why would you sell one that way then?  I hate this strategy, because I think it's a pure ripoff and a setup for failure.  Ask those who use it what their closing (actual sold RTOs) percentages are?  It's a slumlord (no maintenance?) strategy. In case you can't tell, I really hate it.

If your finances are in order, you can get 80% of your equity out of this property to redeploy your capital.  The best way to do that is with a line of credit and not an actual cash out.  At 900/mo rent income, you will easily exceed their debt coverage ratios to qualify if your personal credit is not an issue.  If you run into seasoning requirements at some lenders, just keep looking until you find the right lender with no seasoning requirements. They are out there.

So, I have done a few rent to owns in Florida and just completed one in Indianapolis.  They are wonderful. 

There are two parts to a rent to own: 

1.  The option: This is the device that gives the current tenant the option, but not the obligation to buy the home.  This usually ranges between 5 - 20% of the sale price of the home.  In Indianapolis, I actually got lucky and it was closer to 25% but that is pretty rare. 

I also think you RTO term is WAY too long. I never do more than 18 months and usually only allow 12. I have a friend here who bought a rent to own home (despite my constant protests) and only has a four month contract.

2.  The rent: This is normal rent.  Part of the rent can go towards the purchase of the home or not.  I usually don't put this money towards the home.  

So, the way it works is that you price the home slightly higher than the market because you are taking additional risk.  They pay you a non-refundable option price.  They can then buy the house for an agreed upon price while paying rent in the mean time. 

I like it because if the tenant buys the house, I have sold the house for more than I could otherwise.  If the tenant doesn't buy the home, I get to do it again and collect another option fee.  

Have a lawyer draw up your RTO paperwork. I also include language that basically states I don't do minor fixes on the property as it is basically their home since they are expected to close and purchase.

Hope that helps. 

-Not your Attorney

Well George, clearly predatory dealers are still alive and well as you've outlined.

Might do some reading here on the topic and you'll see the issues and, well, posting how it's done is something you might hold off on till you catch up with opinions and issues we've already posted on, many times. :)

Thanks for the advice @Bill Gulley  

Can you elaborate on how anything I just wrote could be construed as predatory?  

I have a home that I want to sell.  The seller likely has enough for a down payment but poor credit.  They pay slightly (about 5 - 7%) higher than I could get otherwise to compensate me for the Time value of money and the additional risk I take on from not selling the home outright.  

The have a year to figure out their issues and then they get the home.  If they can't do that, they lose the payment up front.  How is this predatory? 

I also looked up some of the articles you mentioned by googling biggerpockets rent to own and found this on the biggerpockets blog:

There is nothing predatory about rent to own and both parties can very likely get exactly what they want out of the transaction. 

Hi ,@George Wendt  

I didn't go to that link because a see a date of 09-19-11 the world has changed since then.

The SAFE Act specifically mentions RTO and refers to the method as predatory

The SAFE Act is incorporated in the Dodd-Frank Act, that has changed how investors are to do seller financing.

RTO is a financing arrangement now regulated at the State and Federal level, the law has teeth.

When I mentioned reading, I  meant the forums, not old blogs, or any blog for that matter nor any podcast. Blogs and podcasts, while some are fine, they don't have feed back to communicate errors or poor advice. Actually, you need to take everything about RE on the internet with a grain of salt and get competent legal advice.  Well, not everything on the internet, this post is on the internet...:)

Thanks for the clarification @Bill Gulley  

According to your post in this thread (and my interpretation is similar)

as long as there is no financing (and I am not financing) and the option contract doesn't go towards their payments then it is not a violation of the SAFE act and is not predatory. 

I apologize for linking to the blog. I thought you were arguing that the very nature of RTO was predatory. That is all I was initially trying to disprove.

BTW, I will be traveling the next few days but would love to hear any additional thoughts you have on the topic. 

@George Wendt RTO is predatory, if you follow the RTO model. There is nothing wrong with doing a lease and giving an option, so long as you are not financing it.

There is another predatory aspect you mentioned. charging more for a property since you're "financing" it, financing does not add value to the RE, charging a premium will  reduce the equity required to finance in most cases, making some deals impossible to close, it's an intentional tactic to get the property back and is predatory.

Several threads in the forums, search "predatory lending" "predatory dealing". :)

If a portion of the payment contractually is allocated toward principle, then you've created a security which is regulated under Dodd Frank.  Not impossible to do but more pain in the *** than it's worth in my life.

A straight and dry Option is better.

If you see registered mortgage loan originator or you'll cover your bases as a seller with any kind of lease to own or rent to own scenario.  

If there's a 1003 app done on the tenant buyer that promises a good result and getting a mortgage down the road you'll be well served by using the RMLO.

I believe the CFPB will eventually have some kind a ruling on a straight lease and a straight option.

You could always use a ROFR and a lease and give the tenant rights of first refusal and avoid the issue of using a lease and an option.

I have to agree with @Robert Leonard  

The closing percentage on RTO is very low. Most of the people looking to buy on a RTO have credit issues that they don't usually overcome during the lease option period. Unless the property is in an appreciating area, it's not going to appraise when the option period is up unless you already have a significant amount of built in equity. I'm not saying this can't be done but it's not as easy as people might think. It's usually the people wanting to buy that get hurt in the long run when the deal doesn't come together.

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