The Edge on Rent to Own in America – Vancouver Real Estate
Rent to own
As Vancouver Real Estate agents, we have experienced so many pros and cons of rent to own I think we have many things we can share for you folks in the US. In a rent to own the tenant pays the regular rent on the property , but adds monthly $300 more for – say 3 years – at the end of which the proprietor grants him a a right to purchase the house at a fixed price . 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 execute the option, the ‘premium/overage’is forfeited 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 buyer sign a legal Contract of Purchase and Sale. There is an addendum to the contract that specifies that a specific portion of the rent goes towards the purchase if the tenants complete the contract. It also specifies that failure to pay rent or meet other terms such as an increase of deposit will cancel the contract. The rent charged , of course, is much higher than the going rental rate and commonly the surcharge credited to the selling price is that amount of the surcharge . 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 . The only constant is change. Your renter loses his main job, follows the lures of travels, or rediscovers what its like to sit on the couch and day dream and there you are. To take your property back from a purchaser that has no equity in the property is VERY COSTLY !
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.
Pros and Cons – Why rent to own?
(This is for Home Buyers – show the seller these benefits )
• Best price in rough real estate markets (perhaps in today’s market in some US Cities ?). Get the property at market economic value or better. You also have more tenant/buyers who are amenable to pay a premium because of the terms.
• ABOVE AVERAGE rental income. Greater Revenue from the property!
• 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 much better tenant : Someone who wants to own , even if in the end he does not end up buying, will make sure you home is in much better shape . There could be quality people in the recently divorced, self employed or new immigrants.
• Less maintenance : Less management. Tenants that feel a “pridefulness of ownership” will pay on time, do maintenance, and work on the front lawn your home. You could also write maintenance as a condition into the deal.
• Larger market of buyers: You are disseminating the base from buyers only to renters/investors.
• Fewer Vacancies : Your phonewon’t stop ringing when you advertise your property as a lease/rent to own purchase deal.
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!
Also , 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.
• Your rental fee is not going down the drain . 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.
• No other down payment required. The option deposit plus the rental rebates will likely take care of the whole down payment.
• Assign the contract. Wherever possible, 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.
• Less 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 of utmost important to have a perfect and enforceable contract of purchase and sale. Make sure you get a lawyer and pay the upfront fees. Trust me, you will not regret it! If the market changes in any way , the owner WILL try to exit the deal. I guarantee it! You do have more leverage as a buyer. With a lease purchase contract, you can control properties that ordinarily require a large down payment for a nominal amount of money without using a lender or going through the loan application process. Yet you will receive the same features.