How does a rent to own program work?

By
Services for Real Estate Pros with Greg Taylor and Associates, PLLC

I've had a lot of questions about renting to own so I thought I'd post a little bit about how a model rent to own program works.

Rent to Own Basics

Rent to Own is simply where you buy the property from the property owner under a
private contract and the owner acts as a financial institution, just like a bank. If you have a
10% to 15% down payment, you can get the property without going through the
traditional qualifying and loan approval process.

the owner will give you a residential lease with the option to purchase the property at a
specified price at any time during the lease period. Each payment you make will
reduce the principle which you owe, just like a standard mortgage amortized
over 15 or 30 years. However, unlike banks, most owners are not in business of providing permanent financing, so wthey can finance you only for a short term, to help you jump from renting into home-ownership.

Most payments are set up based on a 30 year amortization schedule,
but the standard rent to own arrangement would be for 1-5 years. At the end of that term
you will have to obtain a replacement loan from a traditional lender. And again at
that point you would go for a "refinancing" loan, which should be easier & less
costly to get than a "new purchase" loan, assuming you kept your credit straight
and made payments on time.

Frequently Asked Questions:

1. What closing costs, fees and points should I expect to pay? Many people charge a loan processing fee of $100.00, a document preparation fee of $150.00, a credit check fee of $20.00, and an origination fee of 1% of the loan value for handling the owner-financing transaction. However, all such fees are wrapped into your loan, so the only out-of-pocket money you will need to pay will be the down payment. Also, you will need to pay for the 1st year insurance premium to have the home insured against damages. As you can see your total closing costs are a few hundred dollars, so you're not wasting thousands of dollars like in a traditional purchase.

2. Is there a prepayment penalty? No, you may pay this loan off at any time with
no penalty.

3. What interest rate will I be charged? Depending on your credit score and other
indicators of creditworthiness, owners will charge from 4.5% to 8.5% above prime
rate. With prime rate at 5.25%, the rates would be between 9.75% and 13.75%.

4. What if I have 15% or more to put down? With a higher down payment, you can usually get
financed at lower interest rates.

5. What if I don't have 10% down payment? The standard down payment is
10%, but if you have other collateral many owners will work with you to help you become a
home-owner.

6. How quickly can I get approved and move into the house? Typically within 2-3 business days.

7. Do you do a credit check and what happens if I have a bankruptcy or other
credit problems?
  Yes, credit check is done in most cases. But things like
bankruptcies, collections, being turned down for a bank loan or other credit
problems are usually not a problem. If your credit is extremely bad, you can still get approved but it may require you to pay a slightly larger down payment.

8. What happens if I don’t qualify for a bank loan at the end of the term?

If, during the term of the agreement, you were late on your payments, or other
credit accounts, if you incurred additional debt, or jeopardized your loan in some
other way, you were not making a serious effort to get ready for the purchase.
Therefore, many owners won't give you a second chance.

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Show All Comments
Rainer
4,059
Kathleen Melincavage
Mellman and Jukel Realtors - Blackwood, NJ

The lease with the option program that i have implemented here in New Jersey and Pennsylvania has been this.  We charge a 3000.00 option fee that is non-refundabale and of course we charge a 1.5 month security deposit plus the first month.

Now if the renter does not follow thru with the purchase of the property than the security deposit would be returned less the repairs and other fees such as water and sewer and so forth.

Now if the renter does follow thru with the purchase the 3000.00 would be credited towards closing cost and down payment.  The security deposit of the property can as well be used towards closing cost and down payment so the renter may only have to come to the table with a little bit more money and of course pay for the insurances, appraisals and such.

Now the most important part of this is that the you the owner have two separate contracts one for the option and the other is the lease they do not coincide together, because there has been judges out there that feel they are togther. 

Also the 3000.00 is your money that will be deducted from the purchase of the house.  This is not to go into an escrow account because it is not a down payment or a good faith deposit.

Regarding putting more money down thinking that will lower your payment that is wrong information.  The more you put down only lowers the payment by pennies not dollars.  So a person putting 3% down will let say pay 850.00 month, now the person putting 20% down will than pay 825.00 a month.  Th only difference is the PMI on the loan.  So you really need to discuss with your loan officer the different issues.

Well that is all for now because i can make this three to five pages long.

Apr 16, 2008 09:19 AM #1
Rainmaker
535,394
Tim & Susan Fennell
The Legends of Real Estate, REALTORS® - Jacksonville, FL
Jacksonville Real Estate

Greg,

This is possibly the most succinct explanation I've seen on this topic. Thank you.

Do you have other resources or links on the topic that you could share?  In addition to being agents, we are also investors attempting to sell some of our properties that are in the $100K - $170K range. 

We are finding that many potential buyers in this price range are unable to qualify for a mortgage in today's climate.  We would be willing to hold the paper for a couple of years (maybe up to five years) but have been 'hesitant' to do so for a variety of reasons -- perhaps this would be a more viable option for us to offer.

Tim

Apr 16, 2008 09:33 AM #2
Rainer
33,671
Greg Taylor
Greg Taylor and Associates, PLLC - Murray, KY
Murray Kentucky, Real Estate Attorney and Investor

Kathleen - Your program looks very interesting and there are a TON of different ways to make this type of program work.  To respond to one of the things you said, most of the time the payment is based on a total amount financed times an interest rate.  In that instance, the more money you put down, the less payment you would have.  For instance, if you're selling for $50,000, below is the difference between putting $5,000 down and $10,000 down

5k down        Monthly Payment (45,000 at 12% int x 30 yrs) -  $462.88

10k down     Monthly Payment (40,000 at 12% int x 30 yrs) -  $411.45

 

This result is magnified if you do as I do and give a lower interest rate for more money put down.  With 20% down, I would go down to 11.25% and the monthly payment would be  $388.50 instead of $462.88.  

Tim -  If you'll shoot me an email or give me a call, I can answer some more questions in detail.  In addition, I have some forms that I would be willing to share.  There's not a lot of information out there about how to make this work, and every state is different because you don't want to get into the situation of having to foreclose if they stop making payments.  If you're in FLA, I'd recommend you take my forms to your local attorney and have him modify them to fit your local rules.

Apr 16, 2008 04:28 PM #3
Rainmaker
535,394
Tim & Susan Fennell
The Legends of Real Estate, REALTORS® - Jacksonville, FL
Jacksonville Real Estate

Greg - You are right, there just isn't very much information about it (at least, not good/useful information).  In fact, everything we have looked at just didn't seem all that good for either party - buyer or seller - or it was skewed heavily in favor of one party over the other.

I will send you an email.  THANK YOU!

Tim

Apr 16, 2008 04:37 PM #4
Rainmaker
251,689
Robert Machado
HomePointe Property Management, CRMC - Sacramento, CA
CPM MPM - Property Manager and Property Management - Sacramento Area

These deals are hard to pull off because of the uncertainty of the future vlalue.  Plus you have to be a proficient landlord.

Apr 17, 2008 12:13 AM #5
Rainer
149,514
Steve Homer
The HBH Group (Keller Williams affiliate) - Round Rock, TX
To Greg's point, in Texas they are outlawed WRT REALTORS.  We can't be involved in such deals without an attorney...
Apr 17, 2008 08:34 AM #6
Rainer
33,671
Greg Taylor
Greg Taylor and Associates, PLLC - Murray, KY
Murray Kentucky, Real Estate Attorney and Investor

Robert - You don't really have to be a proficient landlord, it clearly states in the docs that all repairs are the Buyers' responsibility, so you really just have to be available to collect a check.

Steve - I didn't know that, it goes to show how powerful the attorney lobby is.   Bloodsucking lawyers.  LOL 

Apr 17, 2008 11:13 AM #7
Rainer
33,671
Greg Taylor
Greg Taylor and Associates, PLLC - Murray, KY
Murray Kentucky, Real Estate Attorney and Investor
Bronson - You're right, and after a few years if you have a good number of these owner-finance deals, you can sell the paper and cash out early if you want to.
Apr 17, 2008 02:38 PM #9
Anonymous
Anonymous
Mike Gray

I'm thinking of buying my first property and then doing a rent to own. Was wondering where I can get a document for doing a rent to own contract.

 

Thanks

Jan 16, 2011 04:55 PM #10
Anonymous
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Rainer
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Greg Taylor

Murray Kentucky, Real Estate Attorney and Investor
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