We get asked this question quite often. Though I must say, it’s been a long time since I’ve seen a landlord offer this as an option.
Let’s look at this from a tenant’s point of view.
Let’s say that I need to rent a home. Either my credit is not very good, I don’t have the necessary income or I don’t have enough saved for the down payment. Or maybe any combination of the three. So I have no choice but to rent. But I really want to get started on owning my own home. So I’m looking for a place that I can rent to own. I’m hoping to find a landlord who will rent to me, and after one or two years, I can purchase the home, hopefully with the help of the landlord. What type of help am I looking for? I want part of my monthly rent to be credited towards the down payment. This is Rent to Own.
Now let’s look from the other side – the landlord’s side.
I honestly don’t know why more landlords don’t offer this option. This is how I would do it.
I would come to an agreement with the tenant where the tenant would purchase the property within either one or two years. The purchase price would be today’s market value plus five percent per year. We would come to an agreement of the monthly rental amount, as determined by market value for a similar rental. Let’s use $1500 per month as our example amount. The tenant would pay me $1500 per month rent, plus an additional $300 per month, which would be credited towards the down payment amount when the property is purchased. So after one year the tenant has a forced savings towards the down payment of $3600 for one year, or $7200 for two years.
So, in the above scenario, the landlord will sell the property for today’s market value plus an additional five percent per year. In addition, the landlord will have market rental income for that period. That seems like a pretty good deal for the landlord to me.
Now, here’s where it gets better for the landlord. In addition to the terms set out above, I would have additional terms.
First, if at the end of the agreed upon period, either one of two years, the tenant does not want to, or cannot purchase the property, the Rent to Own agreement is null and void. The extra $300 per month in rent belongs to the landlord. The tenant must either vacate the property at the end of the lease, or renegotiate a new lease. Either way, the landlord keeps the extra $300 per month.
Now let’s look at the reality of the situation. If the tenant cannot purchase a property at the time of the initial agreement, what are the odds that after one or two years the tenant has cleaned up their credit, increased their income enough and / or saved enough extra for the down payment and closing costs? I would say those odds are not very good. And historically a tenant who enters into an agreement like this rarely ends up purchasing the property. They simply move out and try a different plan.
So, the bottom line is that for a landlord a Rent to Own agreement is almost always a win, win situation. And for the tenant, it rarely turns out well.
If you would like to discuss a situation like this, or any other real estate situations, call Bunny and Art at 732-598-7700, of visit one of our web sites, sites www.55PlusInOcean.com , www.55PlusinMonmouth.com , www.BunnyandArt.com