Should you use a lease/purchase (rent to own) approach to
sell/rent your home?
Whether you are a home owner trying to sell your home or an
landlord trying to lease it, you should consider the
lease/purchase approach. It can result in higher cash flows,
larger profits and fewer headaches.
Have you ever dealt with bad renters? Late payments? Stains on
the carpet? Calls late at night about a stopped toilet?
Sometimes being a Landlord is not a fun game, especially when
you have a nice home and bad tenants.
Have you taken advantage of the recent low interest rates and
refinanced your home to the maximum? What about a home equity
loan or other form of second mortgage? Do you know how much you
can walk away with from the closing table after paying all
mortgages and associated costs, like realtor fees? Many people
walk away with very little or nothing. Some even have to pay. If
this scenario applies to you, it may make sense to delay the
sale of your home. It may be possible to generate positive cash
flow and lock in a higher selling price with a FSBO (for sale by
owner) lease/purchase agreement.
Here's another scenario: You want to sell your own home, but
it's not moving as fast as you would like (or as fast as the
"fast-talking" realtor who convinced you to list it). You've
thought about renting it to cover your mortgage payment, but
nobody wants a short-term rental with no idea when they have to
move out. And what if the tenant WON'T move out when you have it
sold? A FSBO lease/purchase agreement could be a solution.
So you decide to leave it vacant. You make two, three even four
mortgage payments. Your insurance company cancels your
homewoner's policy because it has been vacant for more than 30
days (it's true, they can do it so read your policy!). You don't
want to severely discount the price, yet you need to do
something NOW! Here's a FSBO solution - lease with option to buy
or lease/purchase (also referred to a rent to own).
What does the FSBO lease/purchase of a home mean?
LEASE + PURCHASE OFFER = LEASE/PURCHASE AGREEMENT
At some time in your life, you have rented a house or apartment,
so you are familiar with a lease agreement. If you have ever
bought or sold a house, you are familiar with a purchase offer.
The lease/purchase agreement is a hybrid of the two - a lease
agreement combined with a purchase offer (sometimes called "rent
to own" or an "option," or that is, the right to buy at an
agreed upon price).
Here's an example of how lease/purchase works. Let's say you
have a house worth $100,000. The "going rent" in your market for
that house may be about $800 per month. A lease/purchase
agreement would read essentially as follows:
Lease Term: Two Years Monthly Rent: $800
Purchase Price: $100,000 Rent Credit: $400/month
Usually, part of the monthly rent will be credited towards the
price of the house. In the above example, 50% or $400 per month
is being credited. So if the tenant decides to buy after one
year (lawyers call this "exercising their option to buy"), they
would pay $100,000 - $4,800 = $95,200. If the tenant/buyer does
not purchase the property, the owner would keep all of the
monthly rent. The best part is, the $400/month is considered
"option consideration" by the IRS and does not have to be
reported as income until the house is sold or the lease/purchase
agreement expires!
As you can see, there are many benefits a lease/purchase can
provide you, including:
Immediate relief from mortgage payments
Fast Solution to the "Nice House in a Slow Market" scenario
Guaranteed no vacancy
No need to severely discount the purchase price
Tax deduction (since the property can be treated as "rental" for
tax purposes)
WHY DON'T I JUST LIST IT WITH A REALESTATE AGENT?
It can't hurt to list with a realestate agent or broker.
However, most realestate brokers simply "list" your property.
This means they stick it in the multiple listing computer and
wait for a bite. The first problem with this method is that
there are thousands of other homes in the computer that read
just like yours. If you want to move your house FAST, you have
to offer something different. The lease/purchase is that special
something that makes your house attractive.
The second problem is that most Realtors don't know what a
lease/purchase is, how it works, and how to market such a deal.
Most Realtors will not get involved with a lease/purchase,
because they simply want a higher fee (after all, they have to
make enough money to pay for those large display ads with their
picture on it!).
For more information, check out JSC Rent To Own Homes/