Thus far, 2018 is shaping up to be the year of a buyer’s market. Houses are slow to sell as more and more individuals decide they’d to rent.
The solution for this trend could be to combine the two in a rent-to-own option. This could be the perfect solution for a seller trying to move the property and a buyer who’s hesitant to make a huge commitment.
A rent-to-own commitment occurs when a renter moves into a property and covers the mortgage, taxes, and insurance with an option to purchase the structure at some point in the future. The potential for future purchase is present, but it’s not guaranteed.
If the renter decides he or she would indeed like to purchase the house, the payments that have been made toward the mortgage will usually be used to calculate a reduced price at closing. “The rent to own option is a lot more popular these days,” Matt Brown, director of business at ForSaleByOwner.com told Fox Business.
“It’s a lot harder to get a loan, and a lot harder to sell your house. If you need to move, getting the rent-to-own option is definitely attractive.”
For some, the rent-to-own option is a slam dunk, but for others, it can get messy. Before you opt for a rent-to-own deal on your house, this is what you should know.
You’ll Attract People Who Have Low Credit
Recognize that when you go to the rent-to-own option, you’ll primarily target those with a low credit score. You’ll attract many potential buyers who don’t qualify for regular financing and must use the backroads to buy a house.
They’ve likely missed a few payments or experienced something more substantial like a foreclosure or bankruptcy. This should raise red flags, but it shouldn’t necessarily disqualify the people as renters/buyers.
“There are a lot of legitimately good buyers out there that are having credit issues,” Brown continues. These buyers use a rent-to-own as an opportunity to work toward the purchase of a home while they steadily rebuild their credit scores.
Demand is High
The low credit score may raise a red flag for you, but it’s the reason so many people are interested in the rent-to-own option “There are more buyers seeking it,” says Brown. “There’s definitely demand from the buyer side.”
When the real estate market is overcrowded, offering a rent-to-own option is an excellent way to stand out. You’ll typically get more interest from both buyers and renters, whereas those who only consider selling their property will elicit interest solely from buyers.
You Might Have to Play Landlord
While the renter/buyer will cover your mortgage, insurance, and taxes each month, you’re still the owner of the property. That means any issues associated with the house will remain your responsibility.
You can write in the contract that the tenant is responsible for covering certain maintenance and repairs, like yard work, minor plumbing issues, etc. However, major issues like land disputes and noise problems will land on your shoulders.
If you’re not interested in being a landlord, but believe rent-to-own is the preferable option, you might consider turning these responsibilities over to a property management firm. We’ll handle everything from tenant screening to collecting rent to yard work, so you don’t have to.
Put Everything in Writing
Spell out the terms of your rent-to-own agreement so there are no grey areas involving responsibilities or legal terms. Don’t leave anything to chance.
The length of the lease, for example, should be clearly stated so you’re not waiting forever for the tenant to make a decision. Offer a decent lease length, say three to five years, so the renter has time to save up for a down payment, though.
Treat this contract the way you would a rental. Include eviction terms as well as the tenant’s financial obligations. Usually, you’ll be responsible for major breakdowns, but you can stipulate that a leaky faucet or other minor maintenance items are the tenant’s responsibility.
Many rent-to-own renters may wish to make improvements to the house. Most owners are fine with this because it usually adds value to the home and raises the selling price.
However, you should stipulate that such renovations must be paid for by the renter, and all renovation designs must be approved by you. It’s still your property, after all, and it’s in your best interest to monitor any renovation plans. If that sounds like too much work for you, declare in writing that the renter cannot make improvements.
This is your party. You can call the shots and include whatever conditions you prefer in the lease. Your lease should be clear and strict on the matters that are most important to you, but remember that a lease that’s too strict will strain relations with your renter, and you’re less likely to sell at the end of the lease.
Ask for More Than the Mortgage Payment
If your monthly obligation (including mortgage, insurance, taxes, etc.) is $1,000, that might seem like an appropriate rent fee. But you should charge more than your monthly mortgage payment and a little higher than typical rental value.
You may pocket what’s left or put it into a savings account in case you might need to make repairs or improvements on the house. Some rent-to-own sellers will offer an incentive for their renters in which they charge an extra amount, say $200, in rent every month. They’ll pocket $100 of the surplus and put the other $100 into a separate savings account.
If the buyer decides to purchase the home after the lease is up, the seller gives that money back to the buyer to use as a down payment on the home. If the tenant decides not to purchase, you may pocket the savings! It’s a great way to minimize your risk and potentially increase your rewards.
If you decide to try the rent-to-own approach in the greater Houston area, think about hiring Green Residential as your property management company. We offer a wide array of services, including but not limited to tenant screening, rent collection, eviction services, landscaping, contract writing, maintenance, inspection, and so much more.
When it’s time to sell the home, we can be your certified Realtors. The best part is, we expect a flat-rate fee on all our services instead of a percentage, so you could potentially save big on your home sale.
If you’re looking to maximize your rent-to-own deal, contact Green Residential today!
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