In today?s uncertain real estate environment, it?s not uncommon for someone to have a second home or investment property that is difficult to sell, or for someone to dream of owning a home without having the finances or credit required to make it happen. Rent-to-own, or rental purchase, is a tactic that is commonly used to solve this conundrum, as it allows property owners to sell their home more easily and with more guarantee, and for tenants to work towards finally owning their own home.
Whether you are a real estate investor who would like to move on from their rental property, or a homeowner who hasn?t had luck selling their home in the conventional way, then the rent-to-own strategy might just work for you.
What is rent-to-own?
The entire process of rent-to-own is quite similar to that of leasing a car. Essentially, renters will pay a certain amount of money each month to live in your house, and at the end of the contract period ? which is generally within three years ? they have the option to buy it. The rent they pay each month within the contract period will become income for you, and a small portion of it will be kept aside as an eventual down payment for the tenant to purchase the home.
Making it happen
Before any agreement can be made, you first need to determine the sale price as well as the rent you will require from the tenant. Before the rental agreement is signed the sale price can still be negotiated, but after it is signed the price of the house is locked in until the end of the rental term, even if housing prices change throughout that time.
In the beginning of the rental term, the tenant also has to pay you an option fee in addition to rent premiums. You will work together to come up with the value of the option fee, which will then either become part of the tenant?s down payment, or, in the case of the tenant reneging on the purchase, will become part of your income regardless. The rent premiums will be paid in addition to the monthly rent and will be stowed away as the eventual down payment.
Rent-to-own advantages and disadvantages
As with any real estate contract, there are mutual risks and benefits for both parties. The following are some of the pros and cons that you can expect in a rent-to-own contract:
- Pro: If it seems as though housing prices are falling or are about to fall, you can lock in a better price for your house than perhaps you would get a few years down the line.
- Pro: If your tenant ends up backing out of the agreement, you still get to keep the option fee and the rent premiums as income. So you won?t suffer a financial loss, although you would still be stuck with the property you didn?t want!
- Con: If a new buyer comes along and offers a higher selling price, then you are out of luck. Since you entered into a contract with the tenant, you must carry it out.
- Con: You may be relying heavily on the rental income to pay off a new mortgage or investment, so if the tenant backs out or cannot make the payments, then you risk extra financial burden.
Talk to your real estate agent to see if rent-to-own is the right direction for you. As the seller you have less to lose financially, so it is a strategy that is well worth your consideration.
Source: http://blog.dpn.com.au/selling-property-current-tenant/
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