Rent to Own strategy

[Karina Villamar]

How did you purchase your first rent-to-own property? What strategy did you use?

[Erik W.]

@Karina Villamar, okay, then I can tell you that you should take a closer look at what RTO really is. The whole idea of RTO is you're supposed to be selling the property, not getting rentals for long-term cash flow. Here's what MOST RTO investors that I know do.

They draw up a lease and an option contract.  The two documents are mutually exclusive.  The Buyer/Tenant pays above market rent, takes on most if not all maintenance responsibility, and pays a fee (the option fee) to have the right to buy the home within 1-3 years.

What typically happens is the Buyer/Tenant cannot complete the contract.  I won't go into a laundry list of why that doesn't happen, but it's enough to say that one or more of the following usually happens:

1) Their credit starts out terrible and they cannot raise it high enough in 1-3 years to qualify for a loan to close the purchase.

2) The option contract has a sale price that won't appraise out.  No bank loan = Buyer defaults on the option contract.

3) The higher than market rent the Tenant/Buyer pays prevents them from making any reasonable progress on saving up a decent down payment.

4) The property fails one or more major inspection items to qualify the Tenant/Buyer for a low down payment loan like FHA.

I have talked to many RTO investors, and the majority of them do not want to sell anything. Rather, their stated goal is they want to collect a large option fee, off load their maintenance responsibility to the tenant, collect higher than market rent, and then when the contract expires (which it does 95% of the time), they rinse and repeat. Some have "sold" the same house 7 or 8 times. Several say that fewer than 1 buyer in 100 completes the deal. They claim to be selling houses, but what is the actual outcome 9.5 times out of 10? The results speak louder than their words.

All that said, it's still legal in most states. I'm a free market capitalist as much as the next person, but my personal convictions won't allow me to participate in this kind of deal. You'll have to examine the business and see if that's what you really want to do. I know a few RTO Sellers who do this in a way I consider ethical, and their Tenant/Buyers succeed better than 2 times out of 3 (70%+ success rate). That seems much more reasonable to me, and I could probably do that, but I'm not interesting in hunting inventory constantly. That's the problem when you actually sell the house and the buyer gets it: you have to go find another house.

I hope that helps.