Any investors using Lease options/Rent to own agreements?

Question

Within the next few months, I'll be purchasing single family house to move into and live in for 1 - 2 years to pay down as much equity as possible. After getting a good amount of equity in the house for future HELOC funding, I was going to move out of it and use the property as a rental utilizing a lease option, or, rent to own agreement.

There aren't as many resources for rent to own agreements as there are for standard rental agreements, so I just wanted to inquire and network with investors in the upstate area if they are using it.

What criteria do you have when looking for deals?
How did you craft the lease option contract?

Are there certain markets that work better for lease options than others?
Did you have to incorporate a special tenant screening process?

Etc.

Thanks!

What criteria do you have when looking for deals?How did you craft the lease option contract?

Are there certain markets that work better for lease options than others?Did you have to incorporate a special tenant screening process?Etc.Thanks!

Marc Winter · Answer

@Zachary Hadjah,

Let's define some terms to better answer your question.

1.  Lease/option requires a lease (that does not mention an option), and an option (that does not mention any lease). More on that later

2. Rent-To-Own is an agreement usually where the lease will incorporate the terms of the future purchase of the property.

Which to use? The lease/option as described will be 2 separate documents; the lease can be a standard rental agreement.  The option is a completely separate document, discussing ONLY the terms of their right to purchase the property within a set amount of time for a set purchase price.  The price of the option, paid for by the potential purchaser of the property, is agreed upon and set and is non-refundable.

Some sellers MIGHT credit the cost of the option back to the buyer of the property upon closing, but any details of the option may NOT refer to any lease.

Why?  If you connect the lease (right to rent the property) and the option (right to purchase) you will be providing the renter/purchaser certain ownership rights that are above the rights of a tenant.

If things go sideways and the landlord/owner must evict the tenant/purchaser, a court could force you to eject the tenant.  Think of that like a foreclosure.  That means a lot more time and money will be spent by the owner doing an ejectment rather than a simple eviction.

Seek professional legal advice before moving forward with any of the above.

Hope this helps.  Good luck.  Keep investing and moving forward!

Melodee Lucido · Answer

@Marc Winter  excellent post! I have done several as you explained. @Zachary Hadjah It would do you well to take some time to study in depth the lease/option, rent to own niche. The questions you ask will be easily explained in the BP podcasts and YT videos. L/O is a great strategy but you need to learn how to do it and do your due diligence.

I am just buying 2 more properties using this method. These will be converted to seller fi deals when I finalize the purchases. I've liked this method for making win-win scenarios for all involved.

Happy studying ;-)

Benjamin Aaker · Answer

I've used it once before and ended up selling to great tenants. The tenants of whom you will be looking often can't buy their own home right now, otherwise, they wouldn't be utilizing this agreement, which typically is more complicated and costs them more. So, you'll be looking for those with some correctable reason they can't get a bank loan. Usually this is credit-related.

I used the lease/option model. You sell them the option to purchase by a certain date or in a window of dates for a certain price. This sale usually involves a monthly payment, which is on top of the rent. Part of that is to pay for the option and part will be credited to them on purchase, which results in having to bring in less of a down payment. If they fail to pay this option, then the option will be removed and they will remain as simple tenants.

Your risk is that you will have to set a price which you predict will be the going rate at the time of the option window. If you are wrong, you might have to sell for a price below market rate. If the house value goes down, the tenant has the option to simply not purchase and you would keep their option money.

Markets with high volatility and uncertainty in the job market are places I would look to deploy this tactic.

Nothing different with screening other than you may want to inquire about their previous efforts to purchase a house. If they are interested in this, they probably have tried and been rejected before.

Michael Carter · Answer

No experience yet but I like the idea as well. I will likely hold onto multi-families for the cash flow but seller finance or rent to own any SFH’s I buy because I think they deserve to be owner occupied. And in return I think the health of the overall housing market will benefit as well.

Any investors using Lease options/Rent to own agreements?

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