Lease to Own Seller Benefits?

Question

I had one potential tenant ask if they could lease to own (lease with option to purchase).

Never having done this, I read through several of the blog posts and message boards, but I am afraid I still don't understand the benefit to the seller.

It seems as if the option fee included in this type of lease must later be applied to the tenants down payment for the home, so no benefit there.

I guess if we agree on a price up front and the market tanks, that would be a benefit to me.  But, honestly, I'm a buy and hold type so am not really interested in selling this short term unless the lease portion of the contract has some benefits.

What other benefits are there for the landlord/seller in a lease to own type contract?

Brian Gibbons · Answer

@Jennifer Talcott

Here is some guideline about Owner Occupant Seller Financing, including some lease options, AFTER 10 Jan 2014.

1. The CFPB supervises and fines folks who do not follow Dodd Frank.

2. The ATR or Ability to Repay Rules need to be followed if you are doing any type of seller financing.  See https://www.google.com/webhp?sourceid=chrome-insta...

3. The is a penalty imposed of a, b, c and d IF you do not follow the Ability to Repay Rules.

a. 36 monthly payments

b. Down payment amount

c. court costs

d. lawyers fees

a+b+c+d can be well over $50K on a cheap property

4. HOWEVER if you use a RMLO (registered mortgage loan originator, a federal not state designation) you have some protection.

5. My RMLO is www.SellerFinanceConsultants.com

6. you can buy as many seller financing properties as you want, and rent out;you can not sell as many as you want on seller financing.

7. A pure lease and a non-related option to purchase is not considered financing.

8.  Tax Info from the IRS - How to avoid a Lease with option to NOT recharacterized as a Sale

1. The rent should be at or near fair rental value. Breece Veneer & Panel Co., 232 F .2d 319.  Get a written opinion of the rental value from a qualified real estate professional.

2. Keep rent credits toward the option price to a minimum. Generally, 20% or less is considered reasonable.

3. The option price should be at or near fair market value. Get a written opinion of the market value from a qualified real estate professional. Breece Veneer & Panel Co., Ibid.

4. Try not to tie-in substantial lessee improvements with the option exercise.

5. Do not pass legal (or equitable) title to the optionee\lessee\buyer.

6. Demonstrate that you intend to do a lease-option and that you believe the rent and option price to be reasonable.   See Benton, 197 F.2d, 745; Lester, 32 TC, 711.  Use arm's length lease-option documents along with the counsel of qualified professionals.

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Hope that helps!

Best wishes,

Brian

Patricia A. · Answer

Hi Amy, welcome to biggerpockets I am also a new here, for several months now I am registered with Wendy Patton.com she has an excellent ebook about rent to own. Best wishes and good luck.

Brian Gibbons · Answer

Use sellers concessions instead of rent credits

Amy E. · Answer

That was a very long discussion.  What I noticed is that you cannot apply rents towards the sale price (rents cannot be a credit).  Can you apply rents towards the closing costs instead?

Jennifer Talcott · Answer

@Brian Gibbons  Ok. I'm new enough that I can't figure out what an RMLO is (something something Lease Option?)  Would you be so kind as to enlighten me? lol

Brian Gibbons · Answer

You can get an RMLO and be in good shape

For a long discussion on Dodd Frank

Dodd Frank Summary http://www.biggerpockets.com/blogs/3/blog_posts/39942-dodd-frank-summary

Brian Gibbons · Answer

Amy ur in Georgia which is one of the best states in United States for creative real estate investing

What is common is contract for deed; it is used quite a bit so if you want to have a long-term seller refinanced solution you might want to look in the contract for deed for Georgia, and you might get 10% down from vendee

@Curt Smith is in GA

That said I would try to get a 5% down on a house under hundred thousand and I would not have it applied towards the purchase price it would be an option price

Ex house is worth 100k

sales price is 100k

5k option fee

You can help them buy by offering sellers concessions not rent credits

Amy E. · Answer

How much is the consideration/down payment?  Does it get applied towards the purchase price if they use their option to buy or is it in addition to the selling price?

Jennifer Talcott · Answer

I'm not a lawyer and this is not legal advice.  In fact, I'm fairly new, so definitely take what I say with a grain of salt.

If I were you, I'd research the Frank-Dodd regarding owner financing and consult a lawyer.  I've read some BP posts that indicate you could potentially get into some big trouble if the new rules aren't followed.

Brian Gibbons · Answer

Thanks @John Jackson

@Amy E.

Lease Purchase Advantages For Buyers

Low down payment to get into property.

Qualification restrictions are not as great as in conventional financing.

Past credit problems are not usually a road block, as they would be in the case of

conventional financing procedures.

The option consideration -down payment -is fully credited to the purchase price of the property.

Your rent money is working for you. Part of your rent payment can be credited to the purchase price if paid on time.

Purchase price is usually locked-in ahead of time.

Gives you sufficient time to check out all the features and faults of the house.

Time to check out the neighborhood.

Puts you in legal control of a property for a specified period of time without having to actually own the property.

Time to shop for and obtain the best financing.

Major maintenance and repairs are the responsibility of the owner; you take care of nothing but minor maintenance.

Profits ...in case appreciation occurs and you decide to sell in the future.

The difference between what you paid and any increase in fair market value is all yours!

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Lease Purchase Advantages For Sellers

Usually top sales price for the property.

Large market of available buyers at all times.

Better quality tenants because these are really tenant/buyers.

Higher rent than usual for the market area.

Non-refundable option consideration (down payment) which is the seller's to keep.

All minor maintenance is delegated to the tenant/buyer.

Seller remains on the deed -it's still his property until the option is exercised.

Seller retains the tax shelter.

Lease purchasing (rent-to-own) puts pre-qualified, reliable tenant/buyers in now-vacant properties.

Stops the money hemorrhage of mortgage payments in the case of vacant properties or where a "tenant" may not be paying (it happens).

No fees to pay (especially application fees, 6 to 7% Realtor commissions, closing costs, etc.).

A competent accountant or tax attorney can file legitimate write-offs, deductions, exchanges and other mechanisms provided by law.

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Strategies include lease-option assignments, sandwich lease options, master lease options, etc.