Is Rent-To-Own Homes and Seller-Financing the 'New Bank' for Americans?

Rent-to-own is known by many names, be it land contract, contract for deed, rent with option, owner carry back, owner's terms, seller financing, lease with option and so forth. The terms are similar in their mission-i.e., a seller of real estate offers creative options to tenant/buyers. The means of accomplishing that goal may be with any of the aforementioned terms, many of which have legal definitions that may vary state by state. For this article I will stick to the more commonly known "rent-to-own' and offer to the reader a broad overview of the elements of the concept.

In any real estate (rent-to-own) transaction there is a buyer and a seller, an agreed upon price and the terms. In a typical sale (bank financed) the parties agree on a price, a closing date is set and a lender steps in (if needed). Seller gets the cash, buyers gets the deed and it is a done deal. Not so in rent-to-own.

For example, a rent to own agreement can have a variable price. This is a common practice amongst investors like this author who sell rent to own properties. So what does a 'variable price' mean? A few years back when home prices headed up yearly there was significant value created simply by prices inching higher. A $300,000 house might climb to $360,000 in just two or three years. A savvy rent to own buyer who locked in three years earlier could cash out and many did.

The variable price idea basically was a negotiation between the parties to establish how that future value would be apportioned. The seller may have a clause in the agreement that states that for each year the tenant is in a rent-to-own agreement the price of the home shall be adjusted by the CPI (consumer price index). Or it may have a clause that says the actual selling price would be set at some future point in time (say three years) as determined by a reliable appraisal. In either scenario buyers and sellers can negotiate all the variables.

The other areas of negotiation are the payment amount and down payment. The monthly payment can be treated as simply rent with nothing going toward future equity, or it can be that the entirety of the payment goes towards the principal thereby reducing the balance owed by such amount as is the payment.

As for a down payment it is another area of slicing and dicing the rent-to-own recipe. Though there are many scenarios the most typical is a buyer who is usually a bit short of a cash down payment (not always of course) and may negotiate with the seller for down payment terms. I have seen buyers trade things of value, such as classic cars for a down payment. The down payment can be anything of which the two parties agree. In some rent to own agreements a seller may accept a portion of the monthly payment to go towards a down payment thereby giving the buyer a future 'bank account' on which to draw for the purpose of paying off the seller by obtaining a traditional bank mortgage.

One of the keys and the beauty of rent to own is this 'flexibility' between buyers and sellers, which is generally unheard by institutional lenders at this level of residential borrowing. The buyers and sellers have all this room to negotiate and it is all well and good yet it is in the end game where agreements often fall apart.

In the end game it is that portion or clause(s) of the sales agreement that states when and how the buyer shall cash out the seller. Now it may be that in an owner financed agreement where the seller creates a mortgage note, deeds the property to buyer and the seller is essentially 'the bank.' And this can be structured as a loan of whatever terms are agreed upon, say a 7% interest rate amortized over a 30-year mortgage.

On the other hand an agreement can be more of the typical deal where the buyer agrees to a term (say 2-5 years) and at the end of the term shall cash out the seller. How the buyer cashes out the seller should always be clearly defined in the agreement. The agreement might read that the buyer shall pay off the balance owing on such and such a date, the penalty (or fee) of which for not abiding by the terms of the agreement is the foregoing of any down payment monies, rent credit and actual cash value of home repairs incurred by the tenant/buyer.

It is in this end game that is more of a burden on the buyer. For if the buyer cannot come up with the money to complete the terms of the agreement the seller may be able to simply evict the tenant at that point in time and repeat the entire process with another tenant/buyer.

It is คอนโด ราคาถูก important to remember that this is but a broad stroke of the entirety of the rent to own home industry. There are many laws that discuss rent-to-own (be it lease purchase, land contract, etc.) and they vary by state. These laws can and will have the final say in the event of a dispute between buyers and sellers.

In many situations a seller can be an investor who with respect to the practice of selling in this manner has 'been there, done that'. Most buyers, if new to the game are clearly at a disadvantage, simply because they are usually the more excited of the parties, and it is he who bears the emotional attachment to a deal who is at risk of not taking the time to examine the deal.

That being said it is always recommended for each party before signing on the dotted line to obtain the review of their agreement by at least an rto expert, and when needed a legal opinion, preferably by an attorney who specializes in real estate.

At the end of the day the rent-to-own program is a win-win as long as the parties to a deal go in with eyes wide open with a clear understanding of the path they will soon travel together. When banks are not lending the rent to own seller can often be the best choice as the lender of last resort.

Be safe my friends.

Bud Spofford,