Many people are repairing their credit, waiting on short sales to fall off their credit history, or worse a foreclosure or bankruptcy. All of these events will impact a person’s ability to purchase for up to 7 years. Rent to Own (RTO) is a broadly used term that refers to a few options for getting into your own home sooner when your credit and finances are rebuilding.
- A lease with option to purchase: This is the most common option. It is a basic lease agreement with an “option” clause. When the tenant signs the lease, they provide a deposit, in addition to the security deposit, that allows the tenant/buyer the option to purchase. The deposit will be credited to the purchase price, but if they opt out and decide not to purchase, the seller will keep the deposit. We recommend the deposit be about 2% of the projected purchase price.
- Rent to own: A more complicated option as a portion of each months rent will go toward the tenant/buyer’s down payment or be credited toward the purchase price. This involves the owner to maintain these additional funds so they are available at the closing table. Again, if the tenant decides not to purchase at the end of the lease, the funds are forfeited to the owner.
- A lease and purchase agreement: This is the most concrete and my personal favorite option for someone looking to rent for a period and then purchase. A purchase contract is executed with a settlement date at the end of a separate lease agreement. This makes sure there is no ambiguity as to whether or not the buyer is actually purchasing the home or just going to rent for a period.
While it is obvious why a buyer would want to exercise one of these options, Sellers are less inclined. However, there are benefits to Sellers when you have room in your finances.
- Sell your house faster. One of my clients went under contract in 9 DAYS because they were open to RTO options. For every listing I usually receive at least one inquiry about RTO, and for those listings under $300k, I receive numerous.
- Get more value out of your home. While you are having a renter pay your mortgage covered for a year (or more), you will still be building equity until you get to the closing table. And while you are still paying property taxes, you are also getting the tax benefits. These benefits can outweigh the penalty of reporting rental income.
- RTO applicants are willing to pay more. Because the rental market is so hot, desirable properties go fast. In addition, the law of scarcity means because RTO properties are not plentiful, the market will pay more for them.
If you have further questions or have a property that you would consider listing as a RTO opportunity, feel free to contact us!