Hi @Aaron Bashore, superb question!
I have had many experiences with rent-to-own deals as owners transition them over to us for management and have yet to find one which was remotely fair to the tenant/buyer or which concluded with the tenant/buyer becoming a home owner.
These are typically arrangements where guru's at REIA meetings wink and nod and say how great these deals are for investors because "THE LANDLORD DOESN'T HAVE TO PAY TO MAINTAIN THE HOUSE AND THE TENANT ULTIMATELY NEVER BUYS THE PLACE SO YOU GET TO DO IT AGAIN AND AGAIN"
Usually the deal is structured something like: Option to buy the house for the next 5 years for $95k (market value is $60k), pay $4000 cash to secure option, and pay all utilities and perform all repairs under $500, $100 from each rent payment goes to closing costs should house ever close. (Let's also detail that the house was bought for $20k and the owner put $5k into the house to get heat, water, and electricity active but the home but fundamentally the home would fail any basic HUD habitability inspection)
At the end of 5 years the house most likely will still be worth $60k and the tenant will have $6,000 of theoretical equity to purchase the house with the landlord knowing full well any bank will require the buyer/tenant to come out of pocket ~$30k to cover the gap in equity.
I have seen these renew themselves to attempt to help appreciation catch up with the contract price and I have personally met with un-educated tenant/buyers who thought this was a good deal and are furious when they realize they put thousands of dollars down and really can never really purchase the home.
I have walked numerous homes and communicated with the owner to show them what happens when a broke un-skilled tenant "fixes" the house for a few years...if it isn't actually falling apart and many times even if it does they ignore it.
Lastly it muddies the relationship between landlord and tenant...in the eyes of the law the landlord is liable for the habitability of the property regardless of a separate contract (try to argue with Toledo City Water that the lease specifies the tenant has to pay that bill...try to argue with the Dept of Neighborhoods on a blight citation that the tenant lives there and controls the property and should be the one showing up in court). The lease option / rent to own confuses the owner as to who is actually in charge.
The tenant also gets confused since they are partially empowered as a homeowner...pepto-pink wall paint appeal to the daughter, why not! Three stray cats? Of Course! Demo the bathroom of a standard tub and install some tile and glass block abortion half finished when you finally evict the psuedo-owner/tenant (yes this one happened to me).
In conclusion - I am sure many folks on BP will tout the $$$ they made from lease-options and rent-to-own, I know many in my REIA who have the same position - I have made a solid rental business for over a decade with a simple rental relationship. A clear, no-gimics lease where the tenant performs absolutely zero maintenance and has no authority to change the property and no confusion over who owns and retains responsibility for the habitability and conformance of the property.
My personal opinion is I receive rent income for the rent of the property and there is solid client basis seeking to rent the property, I don't need to use my power as landlord to offer some complicated "buy here, pay here used car lot whose true business is in repo'ing those cars from the poor as soon as they default and restart the process".
Please don't feel this is any form of an attack, I am simply sensitive to the blighted reputation of landlords - contracts such as this are one of the legit reasons the public doesn't like us. :)
Lastly - I have sold several homes to tenants...I set them up with a bank who typically pairs them with a credit repair specialist...the tenant can buy the house at any point when they are ready at the market price whatever that is when they are ready (if the home appreciates then I gain, if the market were to crash like in 2009 by 60% I would decline sale and facilitate the the tenant in purchasing something on the market) . The tenant becomes a home owner receiving all the empowerment our country has in place to help first-time home buyers and I go to a closing at a title company and receive a check. With one stroke of the pen the Tenant becomes Home Owner, simply and in my opinion ETHICALLY. :)
