Why do a rent to own as a Seller in America? – Vancouver real estate
Rent to own - Explained
As Vancouver Real Estate agents, we have experienced so many pros and cons of rent to own we believe we have many things we can share for you folks in the US. When you do a rent to own the leasee pays the regular rent on the house , but adds a nominal monthly amount for – say 3 years – at the end of which the proprietor allow him a an option 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 retained to the owner (after all he had to wait 3 years to find out). As a seller you should only do such a thing if you do receive an excellent price!
How to actually do it?
Depending where you live there are hundreds of way One way is to have the renter sign a complete Contract of Purchase and Sale. There should be an addendum to the contract that lays out that a definate portion of the rent goes towards the purchase if the renters 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 usually the amount credited to the purchase is that amount of the premium . In all cases if the contract is not honored the ‘overage or premium’ is forfeited.
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 take your house back from a purchaser that has no equity in the property is a HUGE HEADACHE !
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 carry through. 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 should you go ahead? - Pros and Cons
( 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 economic value or better. You also have more tenant/buyers who are conformable to pay a premium because of the terms.
• ABOVE AVERAGE rental income. Increase positive cash flow.
• Positive cash flow : 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 better quality tenant : Someone who wants to buy , 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.
• Less maintenance : Less management. Tenants that feel a “pride of ownership” will pay on time, perform maintenance, and make improvements to your home. You could also term these monthly obligations as a condition into the deal.
• Many more buyers: You are spreading the base from buyers only to renters/investors.
• Lower vacancy rates : Your phone will ring off the hook when you advertise your property as a lease/rent to own purchase system
Write a great contract. Legal documents are far more complex. Have a lawyer/notary or a Vancouver real estate agent witness it. In a falling market the tenant WILL want the option price and rental premium back. I guarantee it!
As an aside, owners should also use the lease to own contract ALWAYS instead of an agreement for sale in properties (out of town) say under $30,000. It is a pain to foreclose on default; it is much easier to cancel the lease.
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 money 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.
• Low down payment needed The option deposit plus the rental rebates will likely take care of the whole down payment.
• Assign the contract. Wherever conceivable, 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, and find the best way to restructure your financial state once again!
In Summary: You have full control of the home - and some real time to see the leaks! .
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.