CAN SOMEONE PLEASE EXPLAIN RENT-TO-OWN?

9 Replies

Hey BP!

I somewhat understand the whole rent-to-own thing but am not 100% positive. Can someone please explain the process, how it works for the investor and tenant, the pros and cons for both the tenant and investor. I know its a lot to ask but it would be a huge help.

Thanks for your time!

What Is A Lease Purchase?

A Lease Purchase is a process that combines a basic rental lease with an agreement to purchase, or with an option to purchase the property. The Buyer (or Lease-Purchaser) pays to the seller a monthly payment that usually approximates a rental amount or a typical mortgage payment on the home. A percentage of that payment is typically applied towards the purchase price. At the end of the term, the buyer has the right to purchase the property for the price and terms to which both ?parties have previously agreed.

?Put another way, a lease purchase is essentially a rental agreement combined with a purchase contract with pre-negotiated terms. The buyer leases the property for a specific period of time and then purchases the property before the end of the lease agreement. Sales price, length of rental, rent credits, escrow instructions, etc., are all contained in the agreement.

A lease purchase is a wonderful way to control property without the headaches of banks, mortgages, taxes or immediate loan qualifying. Lease Purchasing gives you the right to buy the property, but not the obligation to buy.

Some of the advantages of Lease Purchasing.

Lease Purchase Advantages For Sellers

Usually top sales price for the property.

Large market of available buyers at all times.

Better quality tenants because these are really tenant/buyers.

Higher rent than usual for the market area.

Non-refundable option consideration (down payment) which is the seller's to keep.

All minor maintenance is delegated to the tenant/buyer.

Seller remains on the deed -it's still his property until the option is exercised.

Seller retains the tax shelter.

Lease purchasing (rent-to-own) puts pre-qualified, reliable tenant/buyers in now-vacant properties.

Stops the money hemorrhage of mortgage payments in the case of vacant properties or where a "tenant" may not be paying.

No fees to pay (especially application fees, 6 to 10%Realtor commissions, closing costs, etc.).

A competent accountant or tax attorney can file legitimate write-offs, deductions, exchanges and other mechanisms provided by law. ? ?

Frequently Asked Questions

Q: What if the tenant/buyer tears up my house?

A: There are no guarantees that a tenant-buyer won't damage your house since you won't be living with them. However, when dealing with tenant-buyers damages are rarely a problem. It doesn't make much sense to damage a house that you intend to buy. As a matter of fact, many tenant-buyers make improvements like new bathrooms, decks, etc., at their own expense. This adds value to the home and doesn't cost you a thing.

Q: When will my house sell?

A: We can't give you an exact date. It will be up to the tenant-buyer to make the ?decision within the time frame they have. In the meantime, your payments will be ?made, which relieves you of the financial burden while it is being sold.

Q: How do I know the Tenant/Buyer will make my mortgage payments?

A: The tenant-buyer can pay you directly and let you forward it to the mortgage company yourself You can also choose for the tenant-buyer to pay your lender directly. If they don't pay, the lender would immediately notify you. You're always on top, either way. Or, a third party can collect all payments and disburse the funds.

Q: Why don't I just list with a Realtor?

A: That's certainly an option, but obviously a Realtor won't make your house payments for you while he's attempting to sell your house. By placing a qualified tenant-buyer in your property, you are covering your payments while you wait for them to purchase your home. ? ?

Q: What's the difference between renting my house and renting to own my house?

A: There's a big difference! With a lease purchase the tenant-buyer is required to put up a binder deposit that is to be applied towards the purchase of the property! If the tenant-buyer does not buy the property that deposit is nonrefundable!

This deposit also serves as an insurance policy against non-performance as well as damage to the property. This deposit pretty much assures that they are serious buyers and not renters.

Q: How can you or your program help me?

A: As a real estate investor we know what homeowners go through when they try to sell their homes. You may be in the thinking about it stage. Maybe you've already tried listing your home with an agent or maybe you haven't decided to go that route yet.

Our job is to provide you with a workable business solution. We do that in a number of ways.

We can handle your property directly by contracting for it;

we can consult with you; or

you can do it yourself with our manual.

Finding The Tenant/Buyers ?

Why Is Lease Purchasing Attractive To Tenant/Buyers?

?Finding the tenant-buyer is the easier part of constructing a Lease Purchase.

There are so many people who would love to be part of the American Dream; to stop renting and own a home of their own, that lease purchasing is very attractive to them. ? ?By moving property using the Lease Purchase Advantage, you can provide a tenant-buyer with a good home, in a good neighborhood and with a decent rent credit. You have the power to make this transaction a win-win solution for both of you.

We do largely the same, but we do owner finance in TX. Our buyers are blue collar Hispanics with no credit. We qualify then per the SAFE Act. They buy the house $5000 down, 10% int (can be refinanced), no balloon, PI TI payment. 50-60k wholesale houses. No investor maintenance. Great for investors, and allows these great folks to buy their own house. Good for neighborhoods too. 

Brian made a typo I think, He said Lease purchasing gives you the right to buy but not the obligation, not true, so I think he meant to type lease optioning in his post, but lease purchase was on his mind because it is the next subject in his post. Glad to see  I'm not alone in these keyboard moments. One reason I try to stick to one concept at a time, lease/option one concept, lease/purchase another. But on the other hand I have seen some posters classifying them as though they are exactly the same, and I hope that isn't the new standard.

Generally, a lease-purchase buyer has no penalty for walking away, other than the money they put down, so Brian is more correct even if he had a brain phart. The can walk without further obligations, other than the lease terms, but that applies to either one.

If you're a homebuyer, I suggest you stay away fro lease-purchase or rent-to-own, most are scams. If you're investing, you should know better than to get ripped.

Owner occupied must be Dodd-Frank compliant unless the seller meets exceptions, for a real dealer, that's not likely.

Lots of pot holes in rent to own and lease purchase deals, most come to a dead end.

Look to Subject-to transactions and seller financing, getting the deed is much, much better.

Good luck :) 

@Brian P.

Thx for your comment.

As an investor: 

a. you can take a thin deal (90% to 100% LTV "Loan to Value") and

a1) offer the seller a lease option assignment where you enter into a lease with option with your LLC and assign the deal (aka wholesaling lease options or cooperative lease options)

a2) offer the seller a lease purchase (a lease and a sale and purchase arrangement) and assign the deal.

a3) offer sub2 purchase to seller then exit with lease with option to buy OR lease then purchase (you must understand the DOS Due On Sale Clause).

a4) offer a wrap - aitd purchase then exit with lease with option to buy OR lease then purchase (you must understand the DOS Due On Sale Clause).

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As a buyer - renter 

b1) you can offer a FSBO, Expired lead, Landlord, Long DOM (days on the market) listing a lease with option or a lease with sales and purchase arrangement.

b2) you can offer the same above leads to a Seller with a lease 

- plus ROFR (right of first refusal) or

-plus ROFN (right of first negotiation) or 

-plus ROFO (right of first offer).

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Dodd Frank

As long as you use a RMLO (registered mortgage loan originator) to underwrite the any Owner Occupied Seller Financing Buyer and use an attorney well versed in Seller Financing, you should be in good shape.

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Getting Licensed

Many REIs think getting a real estate agent sales license is a drag.  Doing seller financed deals and using experienced RMLOs is a market niche that works in this credit strangled market.  And get licensed, as FLA and CA mandate it for assigning lease options.

LOL, thin deal, then at 100% LTV, where is your profit or are we selling to the dumb tenant buyer over the market value and taking the chance that your buyer will never get on BP? :)

brian, yep you are right on, as long as you use a RMLO, you should be good on dodd frank for owner finance. I get people telling me that 'owner finance is now illegal due to dodd frank.' pretty funny. 

Bill G is correct that walking away from a lease purchase generally just costs you the money you have in at the time. Main reason is the seller can usually find a buyer at about the same price or better then the investor was going to pay so loss was not a major issue. But let's play it safe and make sure you have that item covered in your purchase agreement.  

My main office for years was in a building occupied by attorneys, my office was the only non-attorney office in this large building and my office had a kitchen area and conference table in the kitchen part of it besides having our regular conference room. Our kitchen area got to be a gathering spot for people from the legal offices and they were all welcome but because I was a real estate broker/ investor they often liked to share some of their cases with me, maybe it was just to get some feedback. 

Any way I remember three cases of lease purchase investors trying to walk away and losing to the sellers and the final cost to these investors was not cheap. Some guru that probably never done one of these deals himself had hit the area and sold a course which included a sample contract and the warning to check with your attorney before using them to make your million dollars. Each of these investors had bought the course. If they had added a clause or two to their contracts they could have easily walked away with a limited hit, and would have ended up with a lot more money in their pockets at the end of the year.

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