Rent to own – Explained
As Vancouver Real Estate agents, we have see many advantages and disadvantages of rent to own we believe we have many things we can share with you folks in the US. In a rent to own the tenant pays the regular rent on the property , but adds a set fee amount for – for a term of about say 4 years – at the end of which the owner allow him a an option to buy the pad at a set market value . The nominal fee over 3 years is applied to the purchase price (in most cases the tenant now also qualifies for a 5% down payment ). If he does not execute the option, the ‘premium/overage’is retained to the proprietor (after all he had to wait 3 years to find out). As an owner you would only want to do that if you received your best price and then some.
How do I actually set this up?
There are several ways. One way is to have the tenant sign a bona fide Contract of Purchase and Sale. There is an addendum to the contract that states that a certain portion of the rent goes towards the purchase if the tenants complete the contract. The contract also should be very specific stating that if the renter fails to pay the rent or meet a term like increasing deposit, the contract will be terminated The rent charged , of course, is much higher than the going rental rate and commonly the amount credited to the selling price is that amount of the surcharge . In almost all cases, if the renter fails to honour the surcharge, the premium goes to the seller.
But, never, ever transfer title of your property with ‘no money’ down to anyone – buy yes, sell no . The only constant is change. The tenant loses his main job, follows the lures of travels, or rediscovers what its like to sit on the couch and day dream and there you are. To take your house back from a lazy buyer that has no equity in the property is VERY COSTLY !
The most important factor is to have everything in writing. Having things in writing won’t make bad people good and won’t make good people better; all it does is delineate the parameters of any legal carry through. You never want to take legal action if you can possibly avoid it. But a strong rental agreement allows you to make convincing threats.
Why do it? Owner/Investor benefits:
(This is for Home Buyers – show the seller these benefits )
• Best price in rough Real estate markets (perhaps in today’s market in some US Cities ?). Get the property at market value or better. You also have more tenant/buyers who are conformable to pay a premium because of the terms.
• ABOVE AVERAGE rental income. Increase positive cash flow.
• Positive cash flow : It is one way to make a property have cash flow that otherwise would not.
• Non-refundable option or ‘premium – overage of rent’ up front.
• Avoid a commission: Although there are ways to pay a Vancouver realtor as well. ( Not much competition…most Realtors don’t understand it – and some lawyers!)
• Lower advertising costs. Run an ad for rent to own in today’s market and see what happens!
• Get a much better tenant : Someone who wants to own , even if in the end he does not end up buying, will make sure you home is in much better shape . There could be quality people in the recently divorced, self employed or new immigrants.
• Less maintenance : Less management. Tenants that feel a “pridefulness of ownership” will pay on time, perform maintenance, and make improvements to your home. You could also term these monthly obligations as a condition into the deal.
• Many more buyers: You are spreading the base from buyers only to renters/investors.
• Fewer Vacancies : Your phone will ring off the hook when you post your property as a lease/rent to own purchase system
Get a good contract. Legal documents are far more complex. Have a lawyer/notary or a Vancouver real estate agent witness it. In a crashing market the renter WILL want the option price and rental premium back. I guarantee it!
Also , owners should also use the lease to own contract ALWAYS instead of an agreement for sale in properties (out of town) say under $30,000. It is a pain to foreclose on default; it is much easier to cancel the lease.
Why do it? Tenant/Buyer Benefits:
• Grow equity. Sometimes a family cannot get together a down payment.
• Knowing what you will buy. Checking it out for say 2 or 3 years, having the price fixed.
• Your rental fee is not going down the drain . Each month a portion of rent comes off of the sales price eventually.
• The full option deposit is not lost. This cash will be 100% credited to either the D.P. or the sales price.
• No huge initial capital infustions . With a lease purchase, there is only the first month’s rent and an option deposit to pay; no down payment, no closing costs.
• No other down payment required. The option deposit plus the rental rebates will likely take care of the whole down payment.
• Assign the contract. Wherever possible, get the right to assign the contract. If the market goes up, you could assign the contract for a tidy profit.
• Increased buying power. Your buying power is dramatically increased.
• Less credit problems. Qualifying is not as strict as conventional financing.
You will be approved at the sole discretion of the landlord/seller. You will have time to repair your credit, and find the best way to restructure your financial state once again!
In Summary: You have full control of the home – and some real time to see the leaks! .
It is of utmost important to have a perfect and enforceable contract of purchase and sale. Make sure you get a lawyer and pay the upfront fees. Trust me, you will not regret it! If the market rises fast , the seller WILL try to exit the deal. I guarantee it! You do have more leverage as a buyer. With a lease purchase contract, you have the capability of manipulating real estate that normally require a large down payment for a small amount of money without using a lender or going through the loan application process. Yet you get all the benefits
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