Rent to own option ?

12 Replies

First time getting into real estate. I have read that rent to own is a good way to get into real estate if you do not have a lot of money to start. What has been your experience with rent to own option?

The best way to start in my best opinion. I started with my first RO, in 1999 w/zero down payment and no credit till now and it has been an awesome journey. The concept is simple, clean-cut and effective. With no credit and very little down and a great action plan, only the sky is the limit. Create a list of properties (min of 25) in the area you would like to rent-to-own, make sure you visit all the properties on your list regardless of properties listed by For Sale. Schedule a viewing time with whoever is in charge of the property. And finally, make an offer and don't be scared of stipulating your conditions such as; contract price, the length of the agreement, who pays the closing cost (owner) and a separate doc. for rental monies % going towards the property. Always, always have an exit contingency strategy just in case you need to back out of the deal. Make sure you have a good RE lawyer draw-up your agreement and knows your state regulations and law. 

Originally posted by @Maximo Pichardo :

Create a list of properties (min of 25) in the area you would like to rent-to-own, make sure you visit all the properties on your list regardless of properties listed by For Sale.  

Hi Maximo. Could you expand on how you  build your property list please?  Listed for sale?  For rent?  Others? Thanks

So to be clear, YOU would be the "Tenant/Buyer" and purchasing a property from someone else?

I'm not a fan of RTO in general. There are unscrupulous Sellers who know real estate inside and out and will take advantage of newbies. They create lopsided deals where the tenant/buyer pays a large amount of $ up front for a lease option fee, the monthly rent is higher than market, and you are responsible for all the maintenance. Sure, they will credit some of the above market rent toward the purchase price, but keep in mind that the purchase price is likely inflated to begin with, and if you fail to close out the deal you get none of that money or your option fee back.

In short, it should be called one of the riskiest ways to buy a home.

Now if you can find a one off Seller who is simply willing to rent to you until you can close out the purchase, then you may have something. Keep in mind: 80-90% of RTO deals fail to close. This information I've gotten from experienced RTO sellers. They will sell the same house over and over to and average of 8 or 9 buyers before someone finally follows thru on all of the conditions. RTO is legal, but wow...what a tough way to get started!

Another risk is what if the RTO seller gets in legal trouble and the home they are supposed to sell to you gets a lien slapped against it to satisfy a lawsuit judgment. If the Seller cannot clear the title, you're out of luck. Sure you can sue them for your option money and failure to perform on the contract, but how would you collect money from a person who had all their bank accounts seized to pay off a multi-million $ judgment?

In summary, RTO can work for experienced investors who know how to avoid the common pitfalls and possibly a few lucky newbies. But there are easier, less risky ways. For me, the preferable option would be to find a money partner and get title in your name. If the deal is solid, the money will be there.

Hi Maximo. Could you expand on how you build your property list please? Listed for sale? For rent? Others? Thanks

Sure, I started looking for properties listed for sale or rent. Starting out I would look for a place to live - as a field sales manager back then I drove around many communities in the Orlando area I lived in a 2-bedroom apartment and I was looking to lease option a house that I wanted to live in.

Step 1 – In a new notebook while driving/working my goal was to have jotted down 25 homes listed for sale or rent that I would live-in. I took my time, got out of my car and did a walk around through all the homes that I would jot down in my notebook.

After reaching 25 homes in my notebook, I went back to the ones I like the most first. On my 5th home from my list, there was an SFH 3/2-Pool 1900 Sft property listed with Caldwell Banker. I called the agent listed and asked: -

1. how long was the property vacant?

    2. She said for 6 months.

    3. I said what’s the selling price?

    4. She said 189K

    She wanted to qualify me for a loan, and I said well, I don't want to buy it, but I would like to RTO the property first and live in it for a while to see if its what I am looking for. And I am prepared to give you first last and security.

    She said well I'm sorry, but the property is not up for lease, its only available for purchasing. I said that's fine and I understand that however, I am making an RTO offer with good faith money. I need you to contact the owner and let her know. Since all RE agents are required to present all offers to owners regardless. I said tell them I am ready to put down 4K if we agree on some of the terms.

    She was not really happy to follow through, she said I wouldn’t get paid for a lease option. I said if the deal goes through in a year or two from now, you can still collect on your commission.

    Note: Before I called the agent, I researched the property, checked who’s on deed, and mortgages that were recorded.

    Owners  purchased the home for:

    • 140K in 1994
    • And had 110k left on the note.
    • SFH was vacant for 6 months
    • The owners lived in New Jersey / out of town owners YES

    Research and learning all you can about the property is very easy to do with the internet, but it does take a little bit of time and legwork + I was learning along the way.

    The Caldwell agent called me 2 days after, asking what was I offering? I said great –

    • 1. I want a 3-year RTO agreement with separate contractual documents
    • 2. I will contract at current market value 190k
    • 3. Owner’s Pay all Closing Cost about $6,700.00
    • 4. $4,000.00 DP First – Last – Security must be used as the Initial Down Payment
    • 5. $1,333.00 Per Month / with $300.00 going towards the purchase of the property
    • 6. I took care of all repairs and upkeep such as Lawn, pool paint, etc…
    • Owners Owed : $110,000
    • Mortgage Paying: $960.00 Per Month
    • I rented for: $1,333.00 Per Month
    • · Owner Cash Flow: $373.00 Per Month
    • · Owner Cash Flow: $13,428.00 3 Years

    This was my first deal, and the first home I purchased.

    When I spoke to the owners I sold them my idea. I said you are paying $960.00 Per Month plus $80.00 For Pool Maintenance and $80.00 for cutting the grass Etc. And you don’t know when you will sell the property. I’m ready to give you 4k today, and you will make $373.00 in cash flow every month.

    I didn’t have strong credit at the time, so the 2-3 years allowed me to correct my credit while living in a house I liked. Now, if I did not qualify, or did nothing to purchase the property I would lose all of my monies - that's never talked and I know some that did not know this and lost the deal. 

    Owners Deal 

    • $1,120.00 per month
    • 6 Months $6,720.00

    Bottom line – I stayed the three years in the house and fixed my credit. The 3 years agreement purpose is to capitalize on the house price index of 3% per year. Contracting at market value is important because the property equity value helps with loan approval.

    Property appraised at:

    • Appraised @      $229,000.00 -   3 years after
    • Contracted @    $190,000.00 - 3 years before
    • Down Payment - $4,000.00
    • Lease Payment - $10,800.00 Per Month = $300.00 – Separate Contract Document
    • Closing Cost -     $6,700.00
    • Property Cost     $168,500.00
    • Appraised @        $229,000.00
    • Property Equity   $61,000.00
    • Take at closing   $10,000.00
    • Financed House   $178,000.00
    • Sold it in 2005 for $235,000.00

    When I started this deal, I had no credit and no 20% Down payment money. Because I had enough equity and down payment, I structured the deal to take $10,000.00 in cash at closing with a home improvement story I made. That’s how I bought a house with no credit, no money down and 10K at closing.

    I’ve done this about 26 times since then, in fact, the current property we now live in was purchased through a Lease Option deal. I have learned a lot about RE investing property like this, and I like it.

    Anyhow make sure you have a good RE lawyer that in the business, and remember that deals take time, research and the ability to make offers with an exit strategy. 

    @Maximo Pichardo this was for breaking your deal down!! Can you expand on the documents/ contracts you used to complete this deal, and what contracts go to who ( seller, attorney, tenant ect.)? I want to make sure I cover myself and do a deal correctly.

    So there's a ton of information out there to read, however, the key ingredient is to remain engaged with people that need help selling their home. Also, you want to become familiar with your state law and regulations to avoid unnecessary surprises. At the end of the day, education books and seminars are very helpful in understanding the lease option concept but nothing like becoming pro-active in finding that first deal. I think its harder than what it looks in the great skeem of things.

    You mean, homeowners who are already advertising their property as a rent-to-own?  If that's what you're looking at, Victor, you're barking up the wrong tree.  If the homeowner is already advertising as such, they likely know what they're doing and have no need for you or I in the middle of their business.