RENT TO OWN - HOW IT WORK'S RELATED TO REAL ESTATE
Lease to own relating to real estate agreements typically consists of two parts a Lease Agreementand a Purchase Agreement, where the tenant has an option to purchase with in a time period stated with in the agreement. The lease resembles a typical rental lease agreement where lessor(landlord) allows the tenant(lessee) to occupy the property in return for a monthly lease amount. The option to purchase the property usually states purchase price, list of chattels, and terms including the time period during which the tenant is able to exercise the option.
Rent to own lease purchase agreements typically become more popular during housing market downturns(buyer's markets). Lease purchase agreements are commonly referred by professionals as hard to sell properties. Now let's think about it........ If the property was easy to sell or priced right, why would the Seller even offer it as a lease to own. The Seller would sell it using more conventional, traditional methods to Buyers with cash or up front financing.
Benefits for the Sellers and Buyers
The Seller may attract good tenants, get market value for their property and relief from paying a mortgage on a vacant property.
The Buyers excess payment over market rent is building a down payment and easing the way to the benefits of home ownership.
If the Buyer defaults, Sellers generally do not refund any portion of the lease payments or the credited down payment purchase option money and depending on how the contract is worded may retain the right to sue for specific performance.
The Buyer would have the option to sell the property at a gain under an equitable interest, if negotiated.
The Buyer could benefit if the property appreciates in value if the purchase option price is established at FMV at contract start.
Basics of a Purchase Option
The Buyer pays the Seller option money for the right to purchase the property. This option money could be used as a down payment. The amount is negotiated between Buyer and Seller, could be as little as $500.00 over the term of the agreement or it could be a substantial initial sum, generally a fixed monthly amount.
The Buyer and Seller may agree to a purchase price now or negotiate where the Buyer agrees to pay market value at the time the option is exercised.
Option terms are negotiable but generally from one to three years.
Option money is rarely refundable.
Buyer can sell property under equitable interest, if negotiated.
Nobody else can purchase the property during the option period.
Option expires at end of the contact term.
The Buyer is not obligated to buy the property, if negotiated.
Example of How it Works
As previously stated everything is negotiable between the Buyer and Seller, but since the Buyer will be pursuing third party bank financing to exercise the Buyer's option to purchase with in the term, everything must be at Fair Market Value(FMV), or the Buyer's financing will most likely fail.
The most common method with rent to own is within each monthly payment there is an element of rent and purchase down payment. The rent factor must be at fair market value, the down payment factor can be whatever amount the Seller and Buyer elect. Direction regarding the monthly down payment factor should encompass your goal of 5% down or whatever percent down the buyer will need to secure third party bank financing. Depending on the Buyer's credit situation the down payment requirement could be 0%, 1%, 5% or higher.
Assuming monthly rent at FMV is $800.00 + 200.00 monthly down payment factor = $1,000.00 monthly payment. Buyer's financing will verify if $800.00 is FMV rent. At the end of term ie. 1 year, Buyer would have $200.00 X 12 months = $2,400.00 credited towards the down payment. Assuming FMV purchase of $100,000.00, Buyer's bank financing requiring 5% down $5,000 - $2,400(credited), the Buyer would be short $2,600.00 of which the Buyer could make the difference from other savings, or consider increasing either the term or monthly down payment factor.
Compliments of Ron Klingbylea full time top producer real estate professional serving Windsor and the surrounding Essex County Community Areas. If you're thinking of Buying or Selling a home, investment or commercial property or relocating to the Windsor / Essex County Area? Contact me I can help, let my consistent, proven accomplishments and lifetime experience in real estate go to work for you.