Rent-to-own: Any reason I shouldn't? And, landlord responsibilities?

[Chris H.]

I have a home I have put on the market to rent, using a property management company. Is there any reason I shouldn't offer rent-to-own financing? I got the house at sufficient price that it would make sense as both a rental and a flip, and rent-to-own seems like the best of both worlds (higher rent and better quality tenants if they don't stay, and a sale if they do).

Also, in a rent-to-own deal do I have typical landlord responsibilities? i.e. who's responsible if the hot water heater breaks? (I am in Washington State if this matters)

Thanks much!

- New Landlord

[Jennifer B.]

Hi Chris,

You can structure a rent to own deal however your want. I've done several, and I do lease purchases (not lease options) - basically the buyer has to put a significant down payment or deposit (do NOT call it Earnest Money) down and then monthly payments can be towards the rent only or you can have a portion go towards the down too.

You want to make sure that you have two separate agreement - a purchase and sale and a rental agreement. If its all together in the same agreement and there are issues at the end its going to be more difficult.

There are many potential upsides to doing a lease purchase. There are also many downsides. You want to have provisions which include if the house does not appraise (or you can have the buyer waive their financing contingency like I do) and then you also need to outline who is responsible for repairs. I would suggest some kind of cap for repairs, like maybe any repairs over $500 you will take care of ect ect.

Another downside is when the tenant buyer cannot perform on the contract. This leaves them upset and resentful, even if you fully explain to them how this works.

Also make sure that you are not setting up a renter for failure. If they recently lost a home to foreclosure and you do a lease purchase for one year they are definitely not going to be able to buy your home at the end of the term.

If you own the home free and clear, it may be a better idea to offer seller financing and actually close on the home so that they
are the owner. I've had more success doing that then lease purchases. You give them a specific time frame to refinance or you can sell the note.

Whichever way you go, always make sure you are following the rules and regulations and doing deals ethically.