Rent-to-Own deals may work for some of your potential buyers who need a bit of time to build up their savings for a down payment but, these deals may be risky. The selling owner of the property may take advantage of your client by evicting them as tenants. Or, they may keep whatever money your client put down toward the purchase of the property and then rent the house to someone else.
Here are some things for you to know as your client’s real estate agent in order to help protect both your buying and selling rent-to-own parties:
Option Fee – the renter pays a nonrefundable deposit or option fee. The option fee could be a flat fee or a percentage of the purchase price of the house. All or part of that fee could be applied to a down payment or the purchase price for the house.
Rent Premium – This is an amount paid on top of the rental price. The premium would go into an escrow account to be used to purchase the house. Say the rent is $1,000 and the rent premium is $1,200. $200 would go into the escrow account. If the tenant decides not to buy the house, the seller could get all or some of the rent premiums in that escrow account.
Purchase Price – This is the purchase price of the house. The seller could build in an annual increase or a market value clause to adjust for market price increases over time.
Ongoing Expenses – This is who (tenant/owner) pays what for maintenance, repairs, property taxes, insurance, HOA fees.
Option to Buy – The tenant can buy the house at the end of the lease period or the tenant can decide not to buy. If the tenant decides not to buy the house, the tenant forfeits any and all accrued rent premiums and option fees.
Obligation to Buy – There is no flexibility here. If the tenant agreed to buy the house at the end of the lease period, the tenant could face litigation and damages for breach of agreement.
Pros for Buyers to have Rent-to-Own Agreements
1.The buyer needs to work on her credit and/or build up her savings. A rent-to-own agreement locks in the property and the price.
2. Living in the home gives the tenant ongoing, daily knowledge of the home’s strengths and quirks.
- A rent-to-own agreement offers the tenant the ability to back out of the deal if there is a decrease in the valuation of the home during the lease period. There is no “walking away” for a purchased property when the property decreases in value.
- If the value of the property increases during the lease period, the tenant still can purchase the house at the agreed-upon, lower price point.
Cons for Buyers
- If the tenant doesn’t qualify for a loan at the end of the lease term, the tenant can’t recoup any maintenance or premium or option costs.
- The lease may not allow the tenant to have any pets, sublet any part of the house or make any changes such as painting. Doing any of those things threatens eviction.
Pros for Sellers
- Great for sellers who having trouble selling their home
- Committed tenant will likely take better care of house.
- Seller keeps option fees and rental premiums if the tenant backs out from buying the house.
Cons for Sellers
- Can’t sell the house during the lease term.
- If the house value increases during the lease term, still required to sell for the agreed upon, lower price.
- Must verify that property taxes/home insurance/HOA actually paid by tenant…those costs are ultimately the seller/owner’s responsibility.
You as the real estate agent need to verify the actual ownership of the home, the sale price of the house, down payment information and obligations, improvements, rental increases, etc. And, you the agent need to make sure that any rent-to-own agreement is legally binding.