Rent to Own

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So you are thinking about doing a rent to own?

If you are a purchaser that does not qualify now because of recent credit history, type of income, or lack of down payment- you maybe looking at rent to own ads.  They are all over the internet, papers, and posters.

If you are a property owner who wants to defer a transfer of asset and incur capital gains or investment income later, the rent to own is a method of retaining ownership and title to a property, having a tenant to continue to provide income from the real estate, but also have a willing buyer lined up for the future.

 

BUYER CAUTIONS

From a buyer's point of view, here are the pitfalls:

The purchase price you are agreeing to may be grossly inflated over-market.  There are devious scammers who are preying on folks who are not able to buy a home, but desperate to have a place to call their own.  Always consider getting an appraiser of your choice to determine current market value.

The contract maybe written up to secure a cash deposit and to obtain additional monthly deposits- THAT ARE NOT REFUNDABLE.   This may be a purposeful intent to keep your deposits, because the seller wants you to fail to qualify for the purchase of the home later.

SELLER CAUTIONS

From a seller's point of view, here are the pitfalls:

The rent-to-own tenant may never clean up their act with regards to improving credit or qualifying income.  It is a non-sale from day one.  The tenant may abuse the property, and your entitlement is the rent received and the damage deposit.  Any additional deposit intended for the down payment needs to be refundable in order to satisfy future default insured financing requirements of down payment proof

BUYER AND SELLER CAUTION

This is a purchase agreement based on today's sales data.  IF the deal closes sometime in the future, the appraised value near the time of closing is a serious factor, if values have declined.   Insured and conventional bank or trust company mortgage financing is always based on THE LESSER OF the purchase price or current (near closing date) appraised value.

The Rent to Own contract is very similar to a regular CONDITION TO FINANCING sale

  • There is a set purchase price
  • There is a set closing date (that may be sooner if by mutual agreement)
  • There is refundable deposits- for example, $5,000 now and $500 additional deposits, monthly 

The major difference is the prospective owner takes tenancy of the home and pays normal market rent.  It is best to have a written confirmation of normal market rents for similar homes, done by a certified appraiser.

The deposits are monies paid over and above the normal market rent.

There needs to be a clear third party accounting of the rent and additional deposits being paid.  The rent to own tenant should keep cancelled cheques or receipts to a bank deposit; and, the landlord should have a bank account showing the history of deposits.

The moral of the story:  poorly documented rent to own contracts will frustrate a future purchase.  The poor documentation could be because the seller is not familiar with the pitfalls; or, is a serious dirt bag who intends to have a tenant and keep the additional money given in good faith as deposits towards the future purchase.

p.s.

For the investor that is concerned the rent to own tenant will destroy the property and therefore calls the additional down payment deposit(s), "damage deposit(s)", it would leave the contract at risk because a normal condition of financing contract does not include a buyer having to provide a damage deposit.