I have a house not selling so I thought maybe I should try Rent-to-Own on it. Read a book and whatever I could find online.
Was curious what is the general deposit calculation pros on biggerpockets use for rent-to-own - 5/10/15%? Do you advertise this percentage, or it varies from applicant to applicant?
What is the general term of option contract (2/3/4 yrs), do you base it on their credit score (accounting for the amount of time they would take in fixing the their credit) ?
I also have a realtor currently for sale of the house with x% commission. If house is rented then commission is one month's rent How does it work with rent-to-own, since house has really not sold, same as rental?
Thanks!
I have a house not selling so I thought maybe I should try Rent-to-Own on it. Read a book and whatever I could find online.
Was curious what is the general deposit calculation pros on biggerpockets use for rent-to-own - 5/10/15%? Do you advertise this percentage, or it varies from applicant to applicant?
What is the general term of option contract (2/3/4 yrs), do you base it on their credit score (accounting for the amount of time they would take in fixing the their credit) ?
I also have a realtor currently for sale of the house with x% commission. If house is rented then commission is one month's rent How does it work with rent-to-own, since house has really not sold, same as rental?
Thanks!
I avoid the term "rent-to-own" since some may confuse it with seller financing.
I think you're referring to here is a "lease-purchase" or "lease-option" (depending on the paperwork used).
If so, I've spent two decades doing EXACTLY these types of deals, and I LOVE them!
Here are my responses to your questions:
1. Upfront payment: We aimed for between an amount equal to 2 months rent up to 5% of the purchase price. This should be referred to as the earnest money deposit (for a lease-purchase) or option consideration (for a lease-option). Be careful NEVER to call this a security deposit, because it's completely non refundable if they don't buy.
2. Term: We gave everyone 1 year (regardless of credit score), with the opportunity to extend (at a higher price) if they weren't quite ready to buy when the term is up. We found that giving more time upfront didn't attract better qualified residents.
3. Commissions: I recommend not doing this with an agent involved, because you'll likely have to pay a commission on the rental AND on the sale.
Hope this helps.
Good luck!
@Mitch Messer Thank you!! Yes, I meant lease-purchase/option, and not get into seller financing/Dodd-Frank complications. My house is out of state, and I have a full time job so I need help, hence had to get a agent. Don't have much of a choice there.
Please feel free to advise if you think anything else I should be aware of.
- have LEASE AGREEMENT and OPTION TO PURCHASE as two separate agreements.
- Breach of the lease should trigger a clause in the RTO contract causing forfeiture of any monies applied.
- RTO agreement should not give the buyer an equitable interest which would require something more like a foreclosure than an eviction. There should be no difference between an RTO eviction and a 'regular' eviction.
- not give rent credit (due to Dodd Frank)
- Do you pay the property taxes and the insurance, or the buyer does? I am aware utilities and repairs would be tenant's responsibility.
@Mitch Messer Thank you!! Yes, I meant lease-purchase/option, and not get into seller financing/Dodd-Frank complications. My house is out of state, and I have a full time job so I need help, hence had to get a agent. Don't have much of a choice there.
Please feel free to advise if you think anything else I should be aware of.
- have LEASE AGREEMENT and OPTION TO PURCHASE as two separate agreements.
- Breach of the lease should trigger a clause in the RTO contract causing forfeiture of any monies applied.
- RTO agreement should not give the buyer an equitable interest which would require something more like a foreclosure than an eviction. There should be no difference between an RTO eviction and a 'regular' eviction.
- not give rent credit (due to Dodd Frank)
- Do you pay the property taxes and the insurance, or the buyer does? I am aware utilities and repairs would be tenant's responsibility.
Understood. Yes, this is how I would do this.
We pay property taxes as well as a landlord insurance policy. We require the tenant to get a renter's policy, with penalties for non-compliance.
If you're going to market the home as "rent-to-own," consider including a one-page signed addendum that makes it clear the tenant understands they have NO ownership interest in the house and that they are "just" a tenant. (Or, if you have such a statement in your lease, make them initial that clause!)
I would also strongly recommend you have your mortgage broker vet all serious applicants as part of your qualification process to see who actually has a serious shot at qualifying for a mortgage in the future. This will save you tons of wasted time!