Rent to Own Structure Advice

7 Replies

Hello and thank you for reading!

I currently have several rentals located in IL.  I was going to look at selling them as leases came due because I have moved to WI and would much rather invest here.  I spoke to one of my current tenants and they are interested in doing a rent to own and would like to start formatting the details after the 1st of the year.  

I know this can be tricky when it comes time to actually sell the place to the tenants if all the details are not done correctly so was looking for assistance with that along with general advice on how these deals are structured?

Thank you!

Tyler Smith

@Tyler Smith

These can get pretty complicated. Wendy Patton writes extensively on the subject, I'd recommend looking into getting one of her books to start.

I would recommend talking to an Illinois real estate attorney and your CPA. Each state is different and if the property is currently financed you may violate your due on sale clause with a rent to own arrangement. Not that the bank will hunt you down and call your loan but they might be able to. Again these are not situations where you want to wing it, pay a few dollars and bring in the professionals.  

Different states may have different laws and an attorney is always a great place to bounce ideas off of.  In Texas,  I have structured several of these, less than 10% have ever gone through with the purchase.  I worked into the lease, that a portion of their "ON TIME" rent and their deposit will go toward their down payment.  It is also stipulated if it is not purchased, the total of monies paid were rent only and they had to obtain outside financing, unless I was going to finance it myself.  

@Dave Van Horn , thank you.  I found her website and will look into it.

@Jimmy Dudley , yes I do not plan on winging it as I have heard about issues when it comes time to financing and it was not done correctly.

@Vincent Incopero , just sent you an email.

@Ron Flatt , thanks.  What has been your experience as to why only 10% have ever gone through with the purchase?

Most people who make the lease option, have a credit problems.  They do not change their behavior and cannot control their spending.  So when they started they had a 550 to 600 credit score and 2 years later they are somewhere between the same 500 and 600.  

It is easy to talk about raising credit scores, but if habits do not change, the scores will not either

First check with your attorney. I am not an attorney and don't even play one on television. Here are my two cents worth.

When purchasing property in Illinois always get your mortgage company's permission to take title in and Illinois Land Trust. This is not an asset protection strategy per se. It is a way to maintain some level of privacy and avoid probate. Always buy enough insurance.

If you sell a property "Contract for Deed", Bond for Deed" or whatever they call it where you are from the purchaser creates an equitable interest in the property. This means you must start a foreclosure instead of an eviction if the terms of the agreement are breached.

Rent to own implies one contract which may also give the purchaser an equitable interest. 

My recommendation is a stand alone lease agreement that does not refer to or even hint at a purchase agreement. Then you draft a second contract or purchase option. The option refers to the lease and give the buyer specific duties and payments to make including a non refundable up front option fee. 

Dodd Frank has placed limitations on the number of these you can do annually. The Seller Finance Coalition is working to increase that number to 24. 

Good Luck and Good Investing.

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