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