Renter wants to rent/lease to own my property

[Account Closed]

My renter for my property in AZ wants to rent/lease to own my property. Is there a way to do this easily? She does not have great credit, hence the rent to own. It is a newer property and the only way it makes sense for me to get my cash and return back, as well as getting her the property with a low interest mortgage is to have her assume the loan after a few years. Is there a way to set something like this up? I was thinking in order to make it worth our whiles, set up a 3 year lease term with double rent and at the end of the 3 years turn the title and mortgage over to her. Is something like this possible? The three years and double rent would basically buyout my equity and continue the mortgage payments. Please let me know if you have any suggestions or ideas. Thank you!

[Daniel Chang]

The 1st thing you need to do is to find out whether your current mortgage is assumable.  In most cases, it's not.  Even if it's assumable, the terms will likely change.  For instance, you may have great credit and gotten low interest, but she has poor credit so the lender will bump the interest after qualifying her for the loan.  If it's not assumable, then I guess that answers your question.

Providing it's assumable, the rest is as straightforward as setting the terms and drawing up a contract.  

From the sounds of this however, unless you really know your financial numbers, it's probably best to not do it.  Think about it:

Let's say you set up a rental plan that that allows you to earn 10% IRR on your equity for the next 3 years. However, assume that your equity rises 20% annualized over the next 3 years which is a very real possibility if you are leveraged 4x (meaning you have a loan that has 80% LTV). The house will just need to appreciate 5% per year for your to earn 20% per year. Then you are stuck in the contract and essentially had an opportunity cost loss. (approximate math for illustration only)

But let's say the opposite happens, that the house loses 5% per year, and hence you lose 20% per year on your equity.  If she reneges on her end because the house lost value, then I suppose you sue her for specific performance.  But if she already has poor credit, then good luck collecting.