I received another call today from someone looking for a Rent To Own property. Frankly, I haven’t seen one of these on the market for ages. But if I was a landlord, I would think seriously about offering the property as a Rent To Own property. Let me explain how this typically works, and why it works for a landlord.
Here’s How It Works
In the typical scenario let’s say that I own a condo which is a rental property. For the purposes of this discussion the going rate for a condo like mine is $1700 per month. Someone approaches me and wants to enter into a Rent To Own agreement. Now, most people who would want to do this look for something like this because they don’t have the necessary funds to purchase the property.
I would offer them this. The amount of the purchase would be set in advance. I would calculate the current sale value, and since home values are rising at over 5% per year, I would add that to the purchase price. The rent would be, instead of $1700 per month, $2000. However, being the nice landlord that I am, at the end of the lease, either 12 or 24 months, the tenant would need to either purchase the property, renegotiate the terms or vacate the premises. If they were to purchase, I would then credit them with $300 per month towards the down payment. If we renegotiate the lease, the monies to be credited would be forfeited and go into my pocket, and we start over at square one. If the tenant vacates the property the extra $300 per month goes into my pocket.
Win Win Situation – For the Landlord
So for me, this is a win, win situation. The worst case scenario for me is that the property would be sold in either 12 or 24 months at the current market value plus a five percent kicker per year. With the other two options, I would pocket $300 extra per month over what a normal lease would provide.
Rarely does Rent to Own get Purchased
Historically, a very small percentage of tenants who enter a Rent To Own agreement end up purchasing the property.
I also look at it this way. The condo that would rent for $1700 would probably sell for about $180,000. The mortgage on that purchase price would be about $800, taxes no more than $400, and the maintenance fee for the condo about $250. If the tenant could scrape up about $7000 for the down payment, their mortgage payment would be considerably less than the $1700 per month, not to mention $2000 per month. So I figure, if the tenant cannot purchase now, the odds of the tenant being able to purchase in 12 or 24 months are somewhere between nil to none.
Bottom Line
Now, I realize that this is a rather cynical or cold hearted financial plan. However, being a landlord is a business, not a charitable operation.
If you’re a tenant who is having issues scraping up the down payment, there are options. FHA low down payment loans are available. If you’re a veteran, VA loans may be available to you with no down payment. For certain people, first time buyer’s grants are available. Speak with a mortgage broker to see if you can get a mortgage. If yes, contact Bunny and Art Reiman – Realtors and let us help you.