A Seller’s Case for Signing a Rent to Own Agreement

by | BiggerPockets.com

You’ve probably heard other landlords talk about rent to own agreements in the past, but have you ever considered entering into one with a current or prospective tenant? This sort of setup can afford you many benefits over the course of the agreement.

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How Does it Work?

In most situations, real estate investors either rent out a property or sell it. But if you have a property that’s currently being leased by a tenant who’s interested in one day owning real estate, then you may consider the rent to own option.

“Rent to own, also know as lease to own or lease option, is an alternative to traditional renting or buying,” Rent to Own Labs explains. “You could even think of it as a fusion of both, since rent to own is basically just leasing a home until you become eligible to buy it.”

5 Benefits for the Seller

At first, rent to own agreements may sound complex and overrated, but they’re actually fairly easy to setup. Unbeknownst to many, these agreements also benefit the seller just as much (if not more) than the buyer. Check out a few of the specific advantages.

1. Higher Sales Price

If you’re trying to sell your property in a soft market and are having trouble, renting may be your next best option. But you may also find that a rent to own agreement is enticing to individuals who can’t afford to buy a home at the moment. With a rent to own agreement, you can offer a very convenient method of financing to tenants/buyers. As a result, they’ll pay a premium.

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Related: Search rent to own Rent To Own Homes: How to Profit from a Lease Purchase

2. Better Tenants

You’re going to get better tenants when you have a rent to own agreement in place. They know the property will one day belong to them and will therefore have its best interests in mind. They’ll take better care of things, maintain the yard, and respect the neighbors. This creates fewer headaches on your part and is worth its weight in gold.

3. Guaranteed Occupancy

If you set up a rent to own agreement that lasts for five years, you essentially have guaranteed occupancy for that period of time (unless they back out). This reduces the burden of vacancy and turnover rates and helps maximize cash flow.

4. Minimal Risk

There’s virtually no risk for the seller in a rent to own situation. For example, if a tenant/buyer backs out of the agreement after a couple of years, you still get to keep the property and all of the escrow money that they had put forth for the sale of the home.

Related: Rent to Own: What Comes First, the Tenant or the Property?

As Fox Business notes, “Sellers can even have the buyer agree to handle all home repairs and maintenance, placing the burden on the renter if anything goes wrong with the house, and alleviates the need for the seller to act as landlord.”

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5. No Commission

The commission on the sale of a home can total thousands of dollars. For example, if you’re selling a property for $200,000, it’s likely that you’d owe your agent $6,000 at the closing table. With a rent to own agreement, you don’t need an agent and can keep more of your money.

The Best of Both Worlds

As a landlord, don’t immediately shrug off the idea of a rent to own agreement. While you may not be pursuing the sale of one of your properties right now, consider this type of agreement as a mutually beneficial option when you’re OK with the idea of unloading a property in the future.

Would you consider a rent to own agreement? Why or why not?

Let me know with a comment!

About Author

Larry Alton

Larry Alton is a professional blogger, writer and researcher who contributes to online media outlets and news sources. A graduate of Des Moines University, he still lives in Iowa as a full-time freelance writer and avid news hound. In addition to journalism, technical writing and in-depth research, he’s also active in his community and spends weekends volunteering with a local non-profit literacy organization and rock climbing.

11 Comments

  1. It won’t always be a higher sales price. A lot of rentals simply do not justify a higher price. If you have a rental that is actually a fixer, you should be willing to negotiate the sales price because your buyer will want to fix the place up, and that costs money. The seller should recognize that is money that they probably should have spent themselves but did not. Deferred maintenance generally costs significantly more than on-time maintenance. Also do not assume that the buyer cannot otherwise afford the house. Sometime, they choose rent-to-own for other reasons. Remember too, that if they are not paying you, they are paying a lender. This is another reason for giving a price break. You incentivize them to let you have the interest they would otherwise be paying a lender.

  2. tim boehm

    I know a guy who has been pulling this for years, he does a rent to own and charges his rent to own tenant $200 more a month if they want rent to own. he says all the money above his rent will go against the purchase price as his down payment and in 5 years they must get a loan and buy. But his crappy houses will never pass bank and loan inspection so when the prospective buyer go to finance he can’t. People who pull this type of crap should be taken out and shot!

    • Right. Just because something is in the lease does not mean it should be enforceable. His poor tenant have almost no recourse. When they discover they cannot get the loan and want their “down payment” back, they will find the agreement they signed did not account for this contingency. The tenants probably do not have the means or the savvy to fight it. Many landlords, some of them members of BP, will screen out savvy tenants.

  3. I no longer will write rent to own agreements, although I have and will sell the rentals to my renters.

    As an owner, you give up price appreciation to your renter/buyer. If you set the price too high and the house does not appraise out, your buyer cannot buy and the owner loses. If the area and house appreciate nicely and you lock in your purchase price too low, the owner loses.

    Rent to own is lose/lose for the owner and is usually lose/lose for the renter. There are companies in my area that big on rent to own. They way overcharge for the monthly rent and their purchase price is unrealistic. So the geniuses end up with a lot of renter turnover. I see the same houses come up year after year on the rental market.

    Buy a decent house. Fix it up to prevailing market standards. Screen and rent to good stable people. Make the necessary repairs and be a decent landlord. Let them know the house is available for purchase down the road if they desire. When they have their financial act together and they have found a reputable lender, look at comps and set the price so the house will appraise. If you have done well, give them a few bucks off. Help them with a down payment if their lender allows. Don\’t lock in a price when the renter is 2 or 3 years away from buying. Don\’t even mention a price range. They will only hear the lowest number you throw out.

    Being a good landlord is work, but it is profitable work. I find most of the rent to own gurus out there are more interested in theory than the actual results.

    • I once offered a landlord a rent-to-buy agreement after being in his property for two years. His maintenance was so bad, I just wanted to take over the responsibility and get it done right. Looking for another place was impractical because my area has a 0.5% vacancy rate.

    • Dan Redmond

      Melroy, Until several weeks ago I would not have cared less about Dodd-Frank, it just hit us very hard, square in the jaws. Complete stupidity on how we were closed out of a owner occupied refi. While it has probably done much good, it still needs some serious work for main street. All should be aware.

  4. Curt Smith

    I read mostly bad news in the comments above. Sure there’s ways to abuse this business model. This does mean YOU have to as well.

    This is a great way to sell especially if the tenant has stayed longer than 12 months, now your sale is long term cap gains, no carrying costs or selling costs. This is a great deal for the seller AND the buyer who gets to live in a nice house before they fix their credit and buy it.

    Lots of ways to utilize rent to own. Buy from a seller on a lease and option to you, then sell on rent to own. Low cash into the deal and you make the monthly spread and the spread upon sale AND you keep most of the option fee. Some gets given to the seller… AKA sandwich lease option.

    Do this with nice houses in nice areas that will appraise. I set the selling price in the option agreement “price to be determined by an appraisal”. I then give a few $100 to a local agent to write up a BPO with comps etc. I then leave this on the counter when the bank appraiser comes through.

    For every rotten apple theres a whole bushel of good ones doing rent to own properly.

    • Don’t assume the buyer needs to fix their credit. Some of them have stellar credit, but have their own reasons for preferring to avoid the banks. Generally these houses aren’t that nice, and often the buyer wants to have the responsibility of taking care of the house instead of entrusting maintenance and repairs to an unreliable landlord. These buyers want to make it into a nice house. I do not like appraising a house by comps. Most of those BPOs are inaccurate. They are based on listing and sales data, and rarely on the actual inside condition of the house. Also comps tend to be too high generally. I always appraise a house as if it were going to be a rental. If the numbers do not work as rental, then the appraisal is too high.

  5. Scott Pigman

    Keep in mind that not all states treat rent-to-own the same. Here in Texas rent to own basically doesn’t exist. Our state laws put very onerous requirements on option contracts longer than six months; nearly all of which benefit the buyer.

  6. Shannon stallone

    I sent a letter to owners in a specific development stating I was interested in purchasing a home there. I received a call from a man who says he’s not ready to sell because he is emotionally attached to the property but would consider a rent to own option. He says we can buy the property when he passes. He’s 89. Although he did mention that selling right now wasn’t financially beneficial for him, he was more interested in finding buyers who would love the property and care about it was much as he does. He’s owned it since 1970 and it’s been a rental for at least 10 years. My financing is secure so the rent to own option doesn’t hold that many benefits other than avoiding a bidding war and overpaying which is common in the area. Any thoughts, advice or suggestions would be greatly appreciated.

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