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Rent to own

As Vancouver Real Estate agents, we have see many advantages and disadvantages of rent to own I think we have many things we can share with you folks in the US. In a rent to own the tenant pays the habitue rent on the home , but adds monthly $300 more for – for a term of about say 4 years – at the end of which the proprietor allow him a a right to purchase the pad at a set market value . The nominal fee over 3 years is applied to the purchase price (in most cases the tenant now also qualifies for a 95% mortgage ). If he does not exercise the option, the ‘premium/overage’is forfeited to the proprietor (after all he had to wait 3 years to find out). As an owner you would only want to do that if you received your best price and then some.

How do I actually set this up?

Depending where you live there are hundreds of way One way is to have the tenant   sign a complete Real Estate offer of Purchase and Sale. There should be an addendum to the contract that states that a specific portion of the rent goes towards the purchase if the tenants complete the contract. The contract also should be very specific stating that if the renter fails to pay the rent or meet a term like increasing deposit, the contract will be terminated The amount of the surcharge , of course, is at a premium to market rent and ordinarily the surcharge credited to the purchase is that amount of the surcharge . In almost all cases, if the renter fails to honour the surcharge, the premium goes to the seller.

But, never, ever transfer title of your property with ‘no money’ down to anyone – buy yes, sell no . Times change, circumstances change. Your renter loses his job, follows the lure of the wild, discovers the joys of his secretary and there you are. To repossess a property where the purchaser had no original equity is costly and time consuming.

The most important factor is to have everything in writing. Having things in writing won’t make bad people good and won’t make good people better; all it does is delineate the parameters of any legal action. You never want to take legal action if you can possibly avoid it. But a strong rental agreement allows you to make convincing threats.

Why do it? Owner/Investor benefits:

( The following is for Renters - show this to your owner )

• Best price in rough real estate markets (perhaps in today’s market in some cities where there are a lot of bankruptcies ?). Get the property at market value or better. You also have more tenant/buyers who are willing to pay a premium because of the terms.

• ABOVE AVERAGE rental income. Increase positive cash flow.

• Higher rental cash : It is one way to make a property have cash flow that otherwise would not.

• Non-refundable option or ‘premium – overage of rent’ up front.

• Avoid a commission: Although there are ways to pay a Vancouver realtor as well. ( Not much competition…most Realtors don’t understand it – and some lawyers!)

• Lower advertising costs. Run an ad for rent to own in today’s market and see what happens!

• Get a much better tenant : Someone who wants to own , even if in the end he does not end up buying, will treat your place better . There could be quality people in the recently divorced, self employed or new immigrants.

• Lower costs : Less management. Tenants that feel a “pride of ownership” will pay on time, do maintenance, and work on the front lawn your home. You could also write maintenance as a condition into the deal.

• Many more buyers: You are spreading the base from buyers only to renters/investors.

• Fewer Vacancies : Your phone will ring off the hook when you advertise your property as a lease/rent to own purchase deal.

Get a good contract. Legal documents are far more complex. Have a lawyer/notary or a Vancouver real estate agent witness it. In a falling market the renter WILL want the option price and rental premium back. I guarantee it!

As an aside, sellers should whenever possible make very good use of a "rent to own" agreement rather than a contract of purchase and sale in homes that are far away, say around lower than $50,000. It is a real hassle to foreclose on a buyer who failed to pay the rental fee. It is much easier to simply cancel their contract.

 Why do it? Tenant/Buyer Benefits:

• Grow equity. Sometimes a family cannot get together a down payment.

• Knowing what you will buy. Checking it out for say 2 or 3 years, having the price fixed.

• Rent money is not wasted . Each month a portion of rent comes off of the sales price eventually.

• The full option deposit is not lost. This cash will be 100% credited to either the D.P. or the sales price.

• Minimum cash out of pocket . With a lease purchase, there is only the first month’s rent and an option deposit to pay; no down payment, no closing costs.

• No other down payment required. The option deposit plus the rental rebates will likely take care of the whole down payment.

• Assign the contract. Wherever imaginable, get the right to assign the contract. If the market goes up, you could assign the contract for a tidy profit.

• Increased buying power. Your buying power is dramatically increased.

• Fewer credit problems. Qualifying is not as strict as conventional financing.

You will be approved at the sole discretion of the landlord/seller. You will have time to repair your credit, find the best financing available.

 
In Summary: You have full control of the home - and all the time in the world to see if its really worth it! . 

It is vital to have an ironclad contract. Insist on one. Pay for one. If the market rises fast, the owner WILL try to get out of the deal. I guarantee it! You do have more leverage as a buyer. With a lease purchase contract, you can control properties that usually require 10-30% down for a nominal amount of money without using a lender or going through the loan application process. Yet you will receive the same features.

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