owner financing a rental property you own

[Stephanie Boggs]

Hello! Has anyone owner financed a rental property to a tenant?  We have a tenant who is interested in purchasing one of our rentals & I would definitely be interested in getting this one off the books.  It's not in a great neighborhood and she has paid rent on time for the past 10 months with no issues.  Any blogs/books/etc where I can find some useful info on what terms to offer and how to structure this?

Thanks!

[Kevin Sobilo]

I have not done this but have thought about it both as an investor and as an agent when owners have asked my opinion on this.

If you own the property outright, you can do owner financing and literally be the bank. I think most deals like this are ~5 year terms with a 30 year amortization and a balloon payment at the end. That is all well and good, but if the tenant/buyer couldn't get a traditional mortgage today, will they be able to in 5 years? Also, you won't have the control of the property over those 5 years, so if you need to foreclose what will you end up with?

Many times people talk about "rent to own". That seems to often entail a down payment and some of the rent paying down the principle for a few years until the tenant can finally get a traditional loan to pay off the rest. Again, will the tenant be able to get a loan a few years down the line if they cannot do so today? If they can't will you have to repay any of the principle they paid you?  I see this as being overly complicated.

If I was going to owner finance a property to a tenant, I would probably lean towards "rent with an option to buy". In this scenario, you lease to the tenant as you normally would, but in a totally separate agreement you sell them the right (option) to buy the property at anytime within the next X number of years at a given price. For that right (option), they pay you a chunk of money.

For example, if a property is worth $100k, they might pay you $5k up front for the right to purchase it for $95k anytime in the next 5 years.

They lock in the price now and they know you cannot sell from under them while they get their finances in order to complete the sale. Its a defined time period, so if they do not complete the sale you have gained the $5k for your trouble. All the while you are renting to them like you normally would.