A.D. Cantelmo Property Management
Our Business is Property Management in Orange County California
Is “Rent to Own” a good option?
We hear the term “Rent to Own” and it may sound good, but
which party has the advantage when entering into a “Rent to Own” contract. The
answer, just like so many other questions regarding Real Estate is, “It Depends”. People may think about a rent to own situation
for different reasons, a Tenant who loves the property they are renting may not
be able to afford it now, but hope that in a few years they can, so they may
want to enter into a rent to own situation and have some of the rent they pay
every month go towards the down payment after the renting period is over. A
Landlord may want to enter into a rent to own contract if the Real Estate
market is soft and they can get a better price in a rent to own situation, or
they may not be ready to sell now, but a three year period may be perfect for
them.
How Does Rent to Own work?
Just like any business deal, parties can work out any type
of deal they both feel comfortable with, and both parties individually should
have a Real Estate attorney draw up the contract. But here is how a typical “Rent
to Own” scenario works:
If you have a home worth $500,000.00 and a renter who can’t
afford to buy the home now, but want to have the option of buying the home in 3
years at the current price. Then you can negotiate a “Rent to Own” contract.
The Renter would pay an agreed upon option fee, in this case we will set the
fee at $10,000 (The fee is usually a percentage of the selling price) and then you would set the rent for the next three years. In a “Rent
to Own” situation, the rent would usually be a little higher than a normal rent
for that property, because some of the rent will go to "Rent Credits" and if the
sale goes through 3 years later, the rent credits will go towards the down
payment along with the option fee.
So in this case, the home is negotiated for a price of
$500,000.00 in three years and the rent will be $2200 per month with $200.00 per month
going towards a rent credit and an option fee of $10,000 up front.
If in three years the renter decides to go along with the
sale, they will pay $500,000.00 for the home and get all the rent credit for
three years which adds up to $7200.00 and the option fee of $10,000, put
towards a down payment for the home which adds up to $17,200.00.
The question is who get the better deal, the Seller, or Buyer?
Let’s look at some pros and cons’ for both.
For the seller, a pro, would be that they are getting rent
for three years and they have a buyer for the home after three years. The con
would be that the home may be worth more in three years then the negotiated
price and if someone comes along and wants to pay a higher price, they can’t
sell it to them.
Another con for the seller is that after three years the
renter may decide not to buy the property and the seller now has to find
another buyer. The pro is that the seller can keep the option fee and the rent
credits if the renter backs out of the deal.
For the renter, a pro is that they have negotiated a set
price and if the home values go up, they already have earned equity in the
home, but a con is if prices go down then they may be underwater and have trouble getting
loan to buy the home.
In a “Rent to Own: situation, even though you are still a
renter, repairs are usually the renter’s responsibility, so if you decide not
to buy the home, you have paid for repairs for the owner.
A Pro is that you are gradually every month with the rent
credits building up a down payment and also building your credit score, but the con is that if you decide not to
buy the home, you lose the rent credits that you paid every month and also the
option you paid at the start of the contract.
When a renter enters into a “Rent to own Contract” They hope
that at the end of the contract they may be able to buy the home, but if they
still don’t have the credit, or they lose their job and can’t buy the home,
they will lose the rent credits and the option fee.
If the seller stops paying the mortgage, the home could be foreclosed
and the renter forced to move out.
As you can see, there are Pros and Cons on both sides, and
the important thing is that a very strong contract is drawn up at the start of
the “Rent to Own” process so that both parties are comfortable at the end of
the contract period.
A.D. Cantelmo Property
Management Specializes in Property Management in Orange County
Ca.