How do you structure your rent-to-own agreements?

Question

I'm a new investor and because I'm self-employed, I can't get a loan for properties in my local market unless I can put down 20%. I've turned to looking for rent-to-own properties. I'm not quite familiar with the exact process myself, only reading a little bit on the subject here and there but I thought I had enough information to get started. I just got off the phone with a seller who was interested in a lease agreement but his idea of how it's done was different to mine and now I'm wondering if I'm wrong. I wanted to ask the experts to see what's considered "normal" in the rent-to-own space.

My view: (numbers were not exact and meant as an example) Current rent was $1,400/month. We'd do a tenancy agreement at $1,400/month with $1,000/month going towards my future downpayment and the $400 being his to keep. We'd also sign a option to buy agreement at whatever price was negotiated and in 2-5 years, I'd take my "downpayment" to the bank and get a fixed mortgage for 25-30 years. I have two family members who are doing this exact thing and had one seller who wanted to rent-to-own using this method (She was asking way above the normal amount though)

His view: We sign both agreements like normal but no money from the tenancy agreement goes towards the downpayment ($1,400/month.) That's his to keep. The option to buy agreement comes with a monthly of $1,000 which is what goes towards my future downpayment.

As you can see, the numbers work out to  be totally different. That would be $16,800 in lost capital a year. The deal barely worked as it stood and losing an extra $30,000-$40,000 on it killed it completely. Am I wrong with how to structure a rent-to-own?

Nathan Gesner · Answer

So your bothered by the fact the Seller wants to structure a deal that benefits him?

He could rent the place to anyone for $1,400 and then sell it for market price. There's little/no benefit to him renting it to you and crediting an entire $1,000 of that rent towards the purchase price. That's a $12,000 loss to him every year.

The seller takes the most risk. You may fail on your rent payments. You may trash his property. You may change your mind and walk away from the entire transaction just as the market is cooling and he's unable to find a new buyer for the same price. If he knows anything about rent-to-own, he is probably aware that around 80% of these deals fail and the buyer walks away. Because the seller takes almost all the risk, I would only recommend they accept a rent-to-own if it's for a short-term period of 1-2 years, the sales price is agreed to up front and includes market value plus projected appreciation, and the rent rate is higher than normal with the increased portion being applied towards the mortgage (e.g. instead of $1,400 a month, rent is $1,800 a month and $600 goes towards buying down the purchase price).

If I were a seller, I wouldn't waste another minute negotiating with you because your offer is weak. I'm not telling you to stop; I'm just explaining why he may be pushing back.

You're too inexperienced to do this on your own. Hire an attorney.

Duncan Hayes · Answer

@Elijah Williamson one thing i noticed was you said your family member’s seller wants more money than the property is worth. In most cases, sellers don’t sell on terms, meaning you’re gonna have to give a little more to get what you’re asking for. You’re gonna be acquiring wealth at their expense basically, because they take on the most risk in deals like these. You need to start evaluating deals with a win-win mindset, instead of trying to get these houses from their owners for basically nothing. I mean, yeah you’re paying them, but from what I’m gathering you aren’t trying to pay him fairly.

You should figure out the sellers needs and goals, then try to build a deal from that. I’ve offered sellers more money than the property is worth on these types of deals, simply because the tenant or tenant-buyer are the ones paying the debt down, not me. Plus most people only know of one way to sell a house and that way involves them getting all their money at once. You have to make the deal sweet for the seller, not just yourself. And if a win-win situation doesn’t exist, then it’s probably best to just leave them be and move on to the next prospect.

I’m with Nathan. Don’t stop completely, because I would never tell someone to not pursue wealth, but get more training on the subject and possibly hire an attorney to help you. There’s a lot that comes with these types of deals and while i won’t say you can’t start off in the industry doing these deals, i will say you need to be knowledgeable in every aspect of it. At the beginning Thats obviously impossible, but that’s where it’s up to you to gain the knowledge on your own. You should check out propelio academy. There’s tons of training videos in there (for free) on how to do these types of deals. Folks like Grant Kemp. Or purchase a Ron LeGrand course. Something to help you be better equipped walking into the conversation for sellers.

Good luck!