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lease/rent to own house

Posted by williemon (My Page) on
Mon, Jul 25, 11 at 11:10

Ive read a little about lease or rent with option to purchase/own. I am thinking about doing this with my current home as we will be in a newly custom built in about 60 days. We will have a RE atty draw up all the papers.

We have a couple looking to lease and later purchase. Some of their family live in this neighborhod which is how the idea came to be. One spouse has not been in the job for a year yet but has decient credit and the other has spotty credit.

In a lease to own, I read that two contracts are good. One for the renting and the other for the option to buy at a later date. In these agreements, how is it best to deal with systems repairs and the renter wanting to make improvements to the yard, deck and possible other items?

How are taxes and insurance taken care of? We currently still owe for the house however we have 80% of the house value in equity in the house.

Our thought is to have the new house mortgage with a second or HELOC on it to cover a large down payment. Once our old house sells, the lump profit of selling will pay off the second or HELOC and whats left will be a lower monthly payment than what we would otherwise have. This would help to allow us to then schedule special trips and fun things with the kids at times, and at other times allow for extra to be paid on priciple.

Thoughts, ideas and advice?


Follow-Up Postings:

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RE: lease/rent to own house

"Thoughts, ideas and advice? "

Sounds like a pretty bad idea to me. Unless you have an actual down payment (not a HELOC) and cash flow to cover both mortgages, you are just asking for trouble. What happens if they stop paying the rent? What happens if they damage the place? Owning rental property is not "easy money." It also requires the owner to have significant cash on hand to cover the inevitable ups and downs. If you don't have those reserves, it is entirely possible to bankrupt yourself.

The actual contracts depend on state laws, so you'll need a local attorney to advise.

In any lease, the landlord is generally responsible for repairs etc and tenants aren't allowed to make major changes to the property without the owners consent.

Who pays the insurance and taxes? You do. That comes with owning property. It doesn't sound like you have thought this situation through if you don't have answers to these type of questions.


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RE: lease/rent to own house

That's the reason for asking. It is a way to think it through.

As far as cash flow, there is enough to cover the cost of the new mortgage we will have no matter how we structure it. We have paid for land that the new house is on so a 30% down payment is already covered so no PMI. The house cost x to build so we could mortgage x and be done with it. What we wanted to do was take a lump sum and pay the principle down ahead of time so the final mortgage is x-y for cheaper payments later. That way, wife can alter jobs if she ever wanted. Since house is not sold yet, we were approached about rent to own. It would mean we would need to take a HELOC out on the new house, reduce final mortgage (x-y) and pay it along with the heloc. Final cost if interest only heloc would equal full priced mortgage x. The tenants rent would be helping to pay most or all heloc interest. Once old house sells, take profit from that and pay off heloc. Now we would be left with the Mortgage of x-y for the rest of the duration so cheaper payments.

Is this idea really bad or is it workable?

Now from what I have read in other sources about a rent/lease to own, the tenants are supposed to pay for the repair of systems, and insurance. Why would I pay any renters insurance?? I just did not know about taxes. Am I understanding correctly or am I misunderstanding? So far it sounds good to me, but never having done this I am looking to learn more beforehand.


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RE: lease/rent to own house

Do a search here. There is a ton of info on lease purchases.

A lease purchase is exactly what it sounds like. It is a lease contract only if and when the tenants purchase the home. My advice is to squeeze as much money out of the tenants in the form of the non refundable deposit. (unless of course they actually do purchase)


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RE: lease/rent to own house

"As far as cash flow, there is enough to cover the cost of the new mortgage we will have no matter how we structure it"

That isn't the question. Do you have the cash flow to cover the mortgage on the new house AND the mortgage on the old house. If not, what happens if your renter loses that brand new job - last hired, first fired.

On insurance - you need to pay for your own insurance. You can charge a higher lease rate, but you want insurance in your name and that you control. You don't want to have your house burn down and find out your tenant "forgot" to pay the insurance bill.

Frankly, unless you have a lot of cash on hand and don't need the money, this sounds like a bad idea. You are taking on a ton of risk compared to just selling the place and are getting minimal reward. Most people go the lease route as a last resort if they can't sell the place. It is sometimes the "least bad" of the options available, but I don't know anyone who would recommend it as a strategy. Being a landlord is fine if that is what you want to do as a long term investment strategy, but that is a lot different than trying to use a renter as bridge financing.


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RE: lease/rent to own house

IMO, you are better off reducing your asking price and focus on selling that home asap. With renters (even rent to own), you also get hassle and you still have responsibility of that home and things will get old and break even if you have perfect renters. And, the renters usually get precedence over you since you want to fix their things quickly, which makes you feel like a second class citizen.

For example, you will have a huge TO DO list for items related to your new home. But if the dishwasher fails at the rental home, guess what just got moved to the top of the list...pronto? You drove by the home and they have 3 cars in the driveway and a 4th car parked on the lawn. Oh my, how do you handle this if the lawn parking wasn't in the lease? They have a dog now but they say it is a friend's that they are watching. Oh no. It looks like part pit bull to you and your insurance says no pits, what do you do?

As the other home ages, the roof, water heater, carpet, furnace all age and eventually break and need replacement. The interior and exterior will need repainting after a few years. Yardwork and weeding and fertilizer, etc from renters is usually minimal, so your hard will likely deteriorate gradially and you might need to do this yourself again in order to sell it.

You would need to buy homeowners insurance specific for renting the home.

Chances are very, very high that the renters will NOT buy it and then you will have to coordinate them moving out and then you focus on selling the place again, but only after you repaint, touch up, clean the home after the renters left.

I strongly suggest that you focus on selling your home. Having responsibility for 2 homes is not fun and can be stressful and costly. Even if one home is brand new and even if the renters are good. You will still have bills to track and pay for both homes...insurance, taxes, mortgage, maintenance.

It isn't worth the hassle...life is too short.


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RE: lease/rent to own house

The others have some good food for thought.

The first question you need to consider is whether you want to rent your house and be a landlord. Think about all the info the above posters have provided on that front. If you had the cash to buy a house like yours and rent it out, would you do it? If the answer is no, and you're just considering this because of the opportunity in front of you, then you should pass on this deal and just put the house up for sale.

If the answer is yes, you'd like to landlord, then you can figure out how to structure a lease/purchase. Two separate documents is the way I'd go. Don't do a contract for deed or some other hybrid or it'll be tougher to evict them for non-payment.

One document is a rental agreement. You pay for repairs, taxes, insurance, etc. and set their rent accordingly. I agree with the others: you want control to make sure things are paid. If they want to make improvements, I'd allow them to do it on their own dime with your advance approval.

The other document is a purchase option (or purchase agreement with a future date). They can exercise or not, and if they do, you then do the sales paperwork, they get a mortgage, and you transfer the property.

As for your financing question, that's at the bottom of the list. Your first/second mortgage idea seems like a decent plan, since your goal is low payment. But that's not the lowest cost option, as you'll pay a higher interest rate for a 30-year vs. a 15- or 10-year mortgage. Also, your HELOC will have an adjustable rate that may be lower than the 1st mortgage now, but if rates go up it may end up higher. And if your tenants don't end up buying and instead become long-term renters, then your resulting debt service may end up being higher than if you just did a single mortgage.


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RE: lease/rent to own house

"How are taxes and insurance taken care of? "

Like any other lease, by the owner. YOU.

Being a landlord appears easy, until the tenant calls at 2:00 AM for a leaking water heater or failed central air.


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RE: lease/rent to own house

On insurance - you need to pay for your own insurance. You can charge a higher lease rate, but you want insurance in your name and that you control. You don't want to have your house burn down and find out your tenant "forgot" to pay the insurance bill.

More importantly, if the house burns down you want to make sure your name is on the check, not the renter's.


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RE: lease/rent to own house

From reading this I feel like I would have liked to do a lease to own, but what I have discovered is that the couple looking to do this would not be able to afford the monthly payments. My first thoughts were putting the greatest risk on me. This could have put us under if something were to happen. So as it is, we had to back out of the possibility of a lease to own. I still would have liked to do it but Id have to ask quite a bit more than the couple could pay.


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RE: lease/rent to own house

Do not consider rent to own without 10% of the purchase price as down payment. Once thats done you are ok. Make sure rent leaves room for repairs etc. If they dont close after two years you will still come ahead. without the down payment DO NOT do it. I have done these many times to know better!!


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RE: lease/rent to own house

Why would anybody make a "down payment" to rent a house?

If a couple has 10% of the price of the house, you can owner-finance it.

The buyer would pay for the first year's insurance, & the monthly payment would include an escrow for the next tax & insurance billing;
the seller would set up a separate account & deposit the escrow amount in it each month & pay the taxes & insurance as they came due.

This is assuming that the seller owns the house outright.

Almost every mortgage or note includes a "due on sale" clause that prevents the old wrap-around mortgages.

so you can rent it or you can sell it, or you can rent it & give the tenants the option to buy for a certain price at the end of a certain period of time, or you can rent it & give the tenants the first right of refusal should you decide to sell the house at the end of their lease.


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RE: lease/rent to own house

My advice is don't do it under any circumstances. If the sale doesn't happen you may end up with so many repairs/damages that you would be better off reducing the price now. I have been a landlord and would never do it again.

Out of 12 tenants, I had only one who treated my property as their own.


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RE: lease/rent to own house

oops, I just realized that this thread is a resurrection from 2011.


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