If you have a property you own and can't sell, you're
probably wondering what your choices are. A rent-to-own
may be a viable option.
Creating a rent-to-own scenario is very simple. Take for
instance the property you own. Find a buyer to lease it
for a designated period of time and give them the option to
buy that property when they come to the end of that time
period. This strategy may also be known as "lease with
option to buy".
What's Involved?
Once you approve renters, you provide them with two
agreements. One is the standard rental agreement (or lease
agreement). The other is an option agreement, which is the
buyer's right to buy the property. You'll require the buyer
to provide upfront money ("option money" which typically is
3 to 5% of the home's purchase price, depending on the
area). This secures their option to buy the house at a
later date.
Advantages for You, As the Seller
As the provider of the lease option, you'll receive many
advantages, but here are three great ones to whet your
appetite for this strategy: - Immediate cash
flow—you're getting income from a property that was
producing none. - Higher monthly rent—you can charge
buyers more for the privilege of a great house and an
option to buy. - Save money and hassle--tenants may be made
responsible for basic maintenance and repair tasks so you
don't have to bother with such items.
Disadvantages for You, As the Seller
Every real estate deal has its disadvantages as well as
advantages, and you should be aware of them: - Cash sale
dependent upon exercise of option--you don't get a cash
sale until the buyers exercise the option. But, remember,
you've got rent money coming in during the period of the
lease! - Potential hassle—if you don't qualify the
buyers carefully, there's always the possibility they may
prove troublesome tenants in terms of rent payment and/or
house upkeep.
Advantages for the Buyer
Home buyers also get several advantages from the
rent-to-own arrangement, but here are three that will tempt
people to take up your offer:
A. Less cash required compared to conventional financing,
the lease-option has a much lower up-front cash requirement.
B. Try-out period--Buyers can try out the house before
buying to see if they really like it, and it meets their
needs.
C. Ease and convenience--buyers can move in within a day or
two of signing the lease agreement. There are none of the
complications associated with conventional real estate
deals.
Disadvantages for the Buyer
The rent-to-own method has the following disadvantages for
buyers:
1. Lack of tax deductions. 2. Higher monthly rent.
How Long Before a Buyer Exercises an Option to Buy?
On average, a buyer occupies a home for three years before
deciding to buy or move on.
Do You Need a Lawyer to Help Out with the Process?
Yes, unless you're very experienced and knowledgeable about
lease options. Be sure to choose a lawyer who specializes
in real estate, not one who's a "general practitioner."
Think of the fee you pay the lawyer as headache prevention
medicine!
How Do I Advertise a Rent-To-Own Property?
Advertising a rent-to-own property is a simple process. All
you need to do is run an ad under "Homes for Rent" or
similar section in the local and/or neighborhood
newspaper(s). Don't forget the Internet, either! There are
local and national services available specifically designed
for the rent-to-own market.
What Mistakes Should I Avoid?
If you're not experienced in this field, don't attempt a
"do-it-yourself" or "one size fits all" lease agreement.
You'll just be setting yourself up for trouble. As I stated
earlier, find a lawyer who specializes in real estate. A
second mistake is to not negotiate with the buyers for the
price they'll pay once they decide to exercise the option.
Most likely, you'll want them to pay the market price.
After all, it's likely the house will appreciate and why
shouldn't you benefit from that appreciation? Of course,
the buyers will want to lock in the price at the time they
sign the agreement to avoid paying more. So, don't forget
to hone your negotiation skills!
My Last Words of Advice If the market is slow in your area,
don't wait... do it now!
Jack Sternberg
----------------------------------------------------
Jack Sternberg is a nationally recognized expert on real
estate investment who's been in the business for more than
30 years. Sternberg's deals have totaled over $750 million
and he's been to the closing table more than 1,500 times.
For more, visit http://www.askjacksternberg.com
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