rent to own scenario?

[Robert Hastings]

i have several properties and i might consider getting rid of one...

the tenant approached me with a rent to own possibility but im not sure how it exactly works.  i know the concept but how its structured is new to me.  

i would consider selling the house for 45k.  i paid 18k about 3 years ago.  the tenant has been paying me 700.month rent for three years.  he is always good.  he said..."how bout i give you 15k down and pay 500/month for 5 years?"  

so i say to myself thats 500/month=6k/year=30k over 5 years.  that would be a rate of 0% correct?  what would the payment be if i gave a great rate of 3.5%?? (my math isnt good)

but besides the numbers, how does it work?  

1.  i have a title company draft the deed, we go to title agency to sign documents....buyer gives me 15k down? 

2.does the title get transferred at closing to buyer?  

3. does the title go into escrow until its paid off?  

4. what happens if he is late on his mortgage payment to me? can i foreclose? how does that work?  how simple is this??  

5.  once we close on property, he assumes all bills with property?  real estate tax?  water? sewer?  i wouldnt be responsible for anything correct??

[Luc Boiron]

@Robert Hastings what the tenant is suggesting seems more like an owner financed sale than a rent to own. You would be selling him the property now.

Rent to own can be done in different ways, but in my area, it goes like this:

Property market value: $100k.

Market rent: $1k

So you and the tenant agree, showing him comps, that the current market value is $100k. The average sale price has been increasing by 3% per year. You want to close in 2 years. So you agree that the purchase price is $106,090 (3% compounded annually for 2 years).

The tenant gives you a $5,000 down payment. This is not refundable, so it does not need to be held in escrow. If the tenant isn't able to close in 2 years, you keep the property and the deposit.

In the meantime, market rent is $1,000 per month. This is a rent to own, so the tenant should be paying rent, not just the mortgage principle. You would normally negotiate a bit of forced savings. So instead of market rent, the tenant pays you $1,300 per month. Since you are generous, you will count $400 of that per month towards the purchase price. This mean that every year, they are building up $4,800 towards the down payment. If they back out of the deal, or cannot close, you keep the property, plus the initial deposit, plus the rent, plus the additional monthly amount they pay.

So at the end of 2 year, they have given you $5,000 up front, plus $4,800 per year (2 years), so they have paid $14,600 towards the purchase price. At closing, since the purchase price is $106,090, they will still owe you $91,490, which they will hopefully be able to finance with a mortgage, and they will have already paid the deposit of $14,600.

If they are able to close, great, you get the purchase price of $6,090 more than the market value the day you sold it, and have up front cash plus wonderful cashflow in both the rent and the additional payment. If they cannot close, they are still a tenant, so if they can't pay rent, you can still evict them (no foreclosure necessary). On top of that, you will have received $14,600 from the tenant plus $900 in rent per month, or $21,600. And you keep the property.

In what your tenant wants, they want to pay you less than the current rent and own the property in 5 years. Sounds like a bad deal for you, other than the $15,000 up front and the expenses they will cover.

What I'm trying to get at is that what I explained above is a rent to own scenario. What the tenant wants to do is an owner financed purchase. The title would transfer to the tenant, and you would keep a mortgage on the property for the remaining $30,000. You should definitely charge interest on this, and if they could qualify for this loan form a bank, they might as well just buy it from you outright. If not, you can finance it to them at a higher rate of interest, say 5-6%.

Good luck!