Very first Lease option?

Question

Hello, I recently got a property under contract I found on Facebook marketplace. It was being advertised by a wholesaler for $130k.  I went to see it and negotiated it down to $90k.   It needs some updating and my initial plan was to BRRR it into a nice little rental. I then learned that the wholesaler had spoken to a woman before that wanted it as rent to own in its current condition for $130k. The seller was not interested in rent to own so nothing happened. It occurred to me that I could get in touch with her and offer her the rent to own for the $130 without having to do any work. It should cashflow nicely as a rent to own and I am not seeing much downside, but I have never done a rent to own and wanted to get some perspective on the pros and cons of doing it in this case. It seems to me like a pretty easy, straightforward deal but maybe I'm not considering all the risk?  Maybe you can help? TIA!

Bria Johnson · Answer

@Spencer Mollman

Hello!

Are you planning on doing a sandwich-lease option or an assignment lease option? Based on your answer I will have suggestions for both .

However either way what you want to make sure you look for no matter which type of lease option you are doing is the following

1. Make sure the tenant -buyer(TB) has skin in the game. So at LEAST 3.5%-5% down

2. You want to make sure that you screen the tenant-buyer not as a renter but as a “buyer”. Meaning - having a mortgage broker look over their situation so you know EXACTLY what they need to do qualify by the end of the L/O term.

3. Your paperwork needs to be rock solid (making sure no equitable interest is transferred, the seller can NOT sell the property from up under the TB, the down payment that the TB puts down will be counted as their down payment AND making sure that if the tenant buyers doesn’t buy it is explicit that they do not get that 3.5%-5% back)

My biggest suggestion is to make sure the tenant-buyer is NOT a typical renter. I see this happen a lot where people try to put a renter in a rent to own situation.

Good luck! And please keep us posted on your deal

Chris Seveney · Answer

@Spencer Mollman

I would do a lease option where they are renting it but no money goes toward principal or interest of the property but give them an option to buy it from you working x months.

If you do a rent to own where payments contribute to paying down the home then you do need to confirm they have ability to repay and it gets hairy if you need to qualify them as if it’s a mortgage.

Depending on state you also could do seller financing or a land contract