In a rent to own situation, the buyer becomes a tenant. And the seller becomes a landlord. The tenant wishes to purchase the property. And the tenant requests that the landlord credit the tenant with a portion of the rent that the tenant can use as a down payment. So is this a good transaction for both parties? And the answer is ….. Maybe.
Let’s look at the details of this type of transaction by using an example.
The seller has a property that is for sale. The seller does not need the cash proceeds from a sale in order to purchase a new home. If he were to rent the home it would rent for $1600 per month. The selling price is also set at this time. In order for the tenant to receive a credit that can be used to help finance the home at the end of the year, they agree that the rent will be $1900 per month. This will give the tenant a credit of $300 per month, or over a two year period, a $7200 credit. The tenant can use these funds towards the down payment or closing costs. This may be the difference that will allow the tenant to proceed with the purchase. If this transaction closes, this is a good deal for the tenant.
Now on the seller’s side, the seller has sold his property at the price they agreed upon two years before. He has a tenant who will probably take good care of the property because he is sure that he will buy it. But in reality, in these transactions, the tenant rarely saves the necessary funds needed to purchase the property or simply decides that he does not want to go ahead with the purchase. Most of the time, the lease contract includes a clause that states that the seller will not refund the overage of $300 per month. The seller is thus entitled to keep the extra money, and the market is either put up for sale again, offered for rent or a new lease and agreement is negotiated with the tenant.
My recommendation? If you are the seller it is probably a good deal for you, as you will receive a rent that is higher than the market will bear. Worst case scenario? You keep the property and rent it again or sell it. As a buyer? I do not recommend that you enter into a contract such as this.