A Rent to Own Guide

Pros And Cons Of Lease Option For Sellers

So you decided to put your home up on the market, but things aren’t going as smoothly as you hoped. Maybe there aren’t that many interested buyers and the mortgage is getting harder for you to pay while the home sits vacant. Maybe you’ve thought of renting out your property, but the prospect of playing landlord sounds unappealing in the long run. Here’s a solution you might want to consider: Rent to Own, a.k.a. Lease Option, has gained a lot of popularity in the last few years because it offers a hybrid deal to buyer tenants by leasing the property for a predetermined amount of time with an eventual option to purchase at the end. While there are many benefits to using the Rent to Own system of selling your home, there are guidelines you should adhere to prevent any possible setbacks.

Why You Should Rent to Own

First, let’s begin with the benefits of selling your home through a Rent to Own agreement:

Make money off of your property before selling it - You know what’s better than just letting the property sit while you wait to find a buyer? Making some income off of it while your tenant prepares to buy the home via monthly rental payments. The extra money can help you pay down that mortgage a lot easier as well.

Avoid paying a commision on the home sale – When you sell your home the traditional way, you most often go through a realty company and have an agent sell the home for you. Once the home is sold, you must pay the agent a sizable commission for their efforts. Since the commission could be as much as several thousand dollars, it’s more beneficial for you to keep more of the profit from the eventual sale.

Quality tenants are more likely – Since any tenant that shows interest in your home will have the intention to buy, they are more likely to be good tenants and take care of the place. A reasonable person would never intentionally ruin or damage their future home, so it’s in the buyer’s best interests to be good tenants throughout the leasing period.

Potential to get a good price in a down market – Since you have the option to set the price for purchase, you can potentially get more for the home than you would if the market is taking a dip in your area.

The home won’t sit vacant for a long period – Most tenants who enter into a lease option arrangement are ready to move in once the contract is hammered out and signed, so there is virtually no lag time in waiting for your tenant to take over living in the residence.

Reap tax-break benefits – When engaged in a lease option arrangement, you can avoid paying short-term capital gains taxes for the length of leasing period and selling the home at a fixed price.

Cast a wider net for buyer prospects – While the only prospects you’d ever get from traditional home buying would be a few people who can currently get approved for a loan, Rent to Own allows you take tenants who may not currently qualify for a mortgage, but could, in one to three years, while living in a home that’s building equity.

Accrue equity during the leasing period – Speaking of equity, the rental premium your tenant(s) will be paying will provide good equity for the property that will build up over time and be ready to use when the time comes for the tenant to purchase the home.

Advertising the home can be more flexible and less expensive - Most online outlets will only charge you a nominal fee for advertising your property and keeping it active for up to a year while allowing you to change it when necessary.

Retain all fees paid if the tenant leaves prematurely - Your ability to keep the option fee and all rental premiums paid should the tenant not purchase the home is probably your greatest assurance that your tenant will eventually follow through. Most people don’t want to lose that kind of money, though rare exceptions such as sudden financial hardships do occur.

Process for Rent to Own

Now that you are aware of the benefits of selling your home through the lease option method, here is how to get started:

  1. Put your home on the Rent to Own market - There are a few methods you can use, but the best is creating a profile for your home on a website that specializes in Rent to Own properties like www.justrenttoown.com. By putting your home on a designated site for lease option housing, you will also be able to have guidance from the support staff on what you need to set up and manage your profile. Alternatively, you can use a real estate agent to help you find a buyer, but this will also cost you more out of pocket in the long run as well as paying a commission once the home is sold.
  2. Find and choose a tenant-buyer - Selecting a good candidate for the lease option process can be tricky, so follow these simple rules:
    • Check their financial background - Even if they don’t have the best credit right now, you want to make sure that it can be reasonably repaired within the leasing period because if they cannot qualify for a loan in the end, you’ll be back to square one looking for another tenant/buyer.
    • Check their current budget - Your potential tenant’s income should be able to comfortably and sufficiently cover the option fee, your monthly rent + rent credit; if the potential tenant’s income looks as if it will be insufficient to cover all costs plus their other personal expenditures, they may have trouble paying on time as well
    • Make sure you find the person(s) agreeable - If you don’t think you will be able to get along with the person, how do you think trying to solve issues and disputes with them will go? Just like a landlord wants a good tenant for the long haul who won’t be obnoxious and ruin the property, you should demand the same from your tenant.
  3. Negotiate all fees and responsibilities in the lease option contract – This is probably one of, if not the most important step in the process because this is when everything becomes set in stone; things that should be discussed and written into the contract include the following:
    • The rental price per month
    • The rent premium paid per month with the rent
    • The option fee amount
    • Who will be physically and financially responsible for all maintenance on the home
    • The length of the leasing period before the option to buy can be exercised\
  4. Consult with a real estate attorney to make sure the contract is thorough and written correctly. There should be no confusion for either you or the tenant on the requirements for either party. Once the contract is finalized, make sure both you and the tenant sign it before they attempt to move in.
  5. Proceed with the leasing period - Depending on the lease term stipulated in the lease option contract, the tenant will be in your life for the next one to three years, so now is the time to make sure everything is going smoothly with your tenant(s). Always do your best to be positive and supportive of your tenant(s) because you are banking on them buying the place. It would be in your best interest that their finances only continue to get better through the leasing period. Offering advice and helping them through major decisions can go a long way.
  6. Confirm the purchase - If all has gone according to plan with no financial mishaps, your tenant(s) is ready to purchase the home. Once they’ve gotten approved for a mortgage and their accumulated fees applied to the down payment, you will sign over ownership of the home to the now-buyer and get paid for the home. If despite all of your efforts, the tenant is unable, or does not wish to, buy the home for whatever reason, you can keep the fees collected over the leasing period. Downside is you will be right back where you started in finding a new tenant looking to buy.

How To Protect Yourself From Potential Rent to Own Pitfalls

While there are many benefits to using the lease option method of selling a home, there are also some things to keep in mind when crafting the lease agreement with your tenant:

Require at least one to five percent of your home’s value for the option fee – This is standard for most Rent to Own agreements, and will be held onto by you until the time of purchase at which time it’ll be applied to the tenant’s down payment for the home.

Sell your home for five to ten percent above it’s value to account for appreciation - Doing this takes care of a few problems, such as missing out on additional money should your property appreciate during the leasing term. It also can give you a better price despite a down market in your area.

Set a rent premium at a third the monthly rent amount to add to the down payment – This amount is to ensure you build up decent equity in the home during the leasing period. For example, if the tenant’s monthly rent is $1000, tack on $300-$400 each month for the rental premium.

Choose your tenant(s) carefully – Just like a landlord choosing good tenants, you want to choose someone whose goals match yours, namely them wanting to buy a home. Beyond just wanting to buy a home, you should also make sure they have the ability to do so by talking about their financial situation and verifying whether or not they will be able to qualify for a loan after the leasing period.

Settle who will be responsible for all maintenance in the beginning – This should be dealt with when the contract is drafted up initially. Depending on your agreement with your tenant, either you or the tenant will agree to take responsibility for the costs incurred for maintenance. Whoever you decide, just be sure it’s in writing so there is no disagreement during the leasing period.

Keep the leasing period between one to three years maximum - As quickly as you may want to get the home sold, making the leasing period too short will not give a tenant ample time to take care of their financial issues, and ultimately not be able to buy the home. On the other hand, the leasing period should not surpass three years because that may suggest your tenant’s financial situation is either unfit for purchasing the home or that he may no longer be interested in buying.

Keep your home in good condition to encourage buyers – If you want to attract buyers, make sure that there are no underlying problems with the home; a smart tenant will hire a professional home inspector to see if your home will be worth the buy, so keep things in good repair. Also, a poorly maintained home would be reason enough to forego the option to buy the home if a problem is discovered later during the leasing period.

Take an active role in helping your tenant(s) with any financial issues - Though it is not officially your job to help your tenants with their finances, it would behoove you to take some interest as it could potentially keep them from getting a mortgage loan later on. Simple things like giving advice and pointing them in the direction of credit repair can do a lot to ensure they stay on track to buy your home when it comes time for them to enact their purchase option.

In Closing

Trying to sell your home amongst foreclosures and other negative vibes in your neighborhood can be difficult and frustrating at times, but this guide is here to illustrate that if you adhere to these simple guidelines, you can successfully offload your home and make a little profit in the process. If you ever have critical questions, be sure to consult a real estate attorney on the legal rules of the Rent to Own process to be sure that you and your tenant have a positive experience and remain within legal bounds. Now that you have a more comprehensive view of what it means to be the seller in a Lease Option agreement, be sure to visit www.justrenttoown.com to find out more information on selling your home the Rent to Own way.