Rent to own business model question?

15 Replies

Hello everyone!

I am wanting to switch up my business strategy and would like to get opinions on doing rent to owns as a business model.

My question is: can I get big down payments like 20k down and instead of giving them an option to purchase, I give them a 15 year lease and after the end of the 15th year, they get title to the property.

This is how I would like to do it and I don't want to give them title to it right away until the 15th year note is paid off or I'm paid in full anytime.

Has anyone done it this way? And if so, is it a good strategy?

a friend of mine loves this

he sets up the property rent to own

down payment of 10k sometimes as low as 5k depending on the prospective buyer and credit report

they stay in the property for 5 years with the balloon at the end

he also sets them up with a loan officer and analyst for a monthly fee of 75 to make sure they stay on track to get the loan ready and there finances so they can purchase at the end of the term

usually what happens is that will not follow the plan for them to purchase and they default on the loan then he sets it all up again

not only does he get the down payment but he also gets the payments for up to year 4

that's when they have saved enough money and also bought a new car, toys and other crap instead of staying focused on the home purchase

there debt to income changes and they cannot qualify for the purchase

many ways to make rent to own work this is just one scenario

enjoy

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@Tarek Wazzan We've worked with investors doing the lease options. They love that business model due to not having to provide repairs, getting a decent down payment, and their ability to determine the sales price not negotiated down several thousands of dollars. They also like that if a buyer defaults and is evicted they can do the same lease option with a new buyer at the same terms with another large down payment and they have an end in sight whether it's 12 or 24 months to where they should be able to qualify for a traditional loan. 

Tarek- what you're referring to in your question is not a lease option. Depending on how you structure it, you may be able to do the transaction the way you're thinking, in general, as a lease purchase. But the solution to your question is more in lines with a contract for deed, installment sale, seller financing deal, land contract, etc... 

These are different varieties of transactions, but they are not the same as lease options.

There's tons of great resources here on BP and elsewhere on how to properly do land contracts / contract for deeds and seller financing type deals. Definitely do some more research and then get with your local title company and real estate attorney for all the proper paperwork. Good luck out there.

Yeah that works @Tarek Wazzan . It should be no problem getting $20k+ because you are holding the mortgage for 15 years (assuming that is what you are doing) and they wont have to qualify with a bank. Just make sure you get the terms ironed out and closed with an attorney to cover any loose ends. Good luck!

Hi @Tarek Wazzan

If you get more than 3% of FMV you run the risk of a "disguised sale" by a re court or by the IRS.

Better to sell on a land contract and vet the buyer as to the ATR rules of the CFPB if you want a long residential term and a large down payment.

See an attorney well versed in default issues of a contract for deed - land contract.

See

http://digitalcommons.law.utulsa.edu/cgi/viewconte...

If your business model is to put tenant buyers in a property to fail, your a sad individual. This is a prime example of why "Rent-To-Own" gets a bad rap. I do lease options as well, and I plan for the t/b to be successful in purchasing a home. I understand life happens and people make mistakes, but I know that when I put someone in one of my properties I'm very confident that a t/b is going to follow through. Don't get me wrong, I still make good money with their down payment and the interest from the monthly payments. Another thing, I don't get how that just because you hold the note, unless your giving them title, it's still your house. You are still, ultimately, responsible for the repairs because they are really just a tenant until they are on title.

I really wish some you investors would take a closer look at your business model to be more aware of who your selling and renting to. There is still a lot of money to made with RTO properties. You just don't have to get all from one tenant. that is a sure fire way to be labeled "Greedy Slumlord".

Hey Tarek!

This absolutely is a viable business model and it is all that we do.  Depending on the price of the home, you can get different size down payments but we've gotten anywhere from 3%-10% of the purchase price.  You wouldn't be giving title to any of these tenant/buyers until they get their own loan.

Prior to accepting any buyer we are getting them prescreened to find out how long it is going to take them to get a mortgage.

The benefit of doing it this way as opposed to wholesaling is that you can get up to 3 different paydays as opposed to only 1.  

Hope that this helps.  Any other questions shoot me a private message and I can give you some things to check out.

Chris Pre

Originally posted by @George Taylor :

@Tarek Wazzan We've worked with investors doing the lease options. They love that business model due to not having to provide repairs, getting a decent down payment, and their ability to determine the sales price not negotiated down several thousands of dollars. They also like that if a buyer defaults and is evicted they can do the same lease option with a new buyer at the same terms with another large down payment and they have an end in sight whether it's 12 or 24 months to where they should be able to qualify for a traditional loan. 

When you say they don't have to deal with repairs, is that just luck? From what I've read in here the owner is responsible for repairs legally. And I also read a lot that owners have lease options structured so they don't deal with repairs. Does this mean the typical business model for this strategy is to take this risk that the tenant won't take the owner to court for the repairs, that this risk is small enough? Are we just banking on the tenants not knowing their legal advantage to require the owner to pay for repairs regardless of what contract they signed? Or have I read wrong?

@Benjamin Cowles Here in NC a lease option states that the purchaser is responsible for the upkeep  of the property, the same as the bank holding the mortgage for a borrower but isn't responsible for making repairs.  I can see the business model being you purchase the home, find a buyer for a good down payment, not be responsible for any repairs and agreeing to a normal retail sales price. It's great if you can afford to deal with some issues but repairs and updating the home would be negotiated between the buyer and seller before signing their contract. 

Originally posted by @George Taylor :

@Benjamin Cowles In my former venture my partner was the one who knew all of the fine details and I mainly found end buyers and marketed the properties so I know a little about it.

 Ah. So I'll have to look deeper into this as far as my state. Thanks George

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