We are providing some landlord education today, and specifically discussing a few things related to rent to own properties. Many homeowners and prospective tenants are looking for rent to own situations, or lease options. There are different things out there people use to attempt to get the tenants to buy the property during the lease. Maybe they purchase it at the end of the lease or a portion of the rent proceeds go to the purchase price of the home. However the arrangement is designed, you have to keep some important things in mind.
Mortgage Contract versus Lease Contract
Sometimes homeowners find there are unintended consequences when doing something like this. A rent to own contract can look more like a mortgage than a lease. This is problematic because in order for the landlord to remove the tenant for nonpayment, that landlord would have to go through a foreclosure process instead of an eviction process. Foreclosure is longer and more expensive. It could cost you $20,000 in legal fees to foreclose as opposed to if you just leased the property to your tenant, and it would cost $500 to evict. If your goal is to get them to buy the house, they can rent it and you can still give them an option to buy at the end of the lease. Build this relationship with the right foundation.
A lot of time, rent to own situations are designed to attract underqualified people who cannot get traditional financing. Be aware of this. It could be a red flag that they have a low FICO score or they don’t have verifiable income. If they default, you could have a problem collecting. Keep this in mind, and don’t look at the small goal of getting someone in the home. Do what’s best in the long run. Hasty decisions can be expensive.
These examples are frustrating because they could have been handled differently and with less time and money expenditures. Make sure if you do a rent to own, you have a contract drafted by an attorney. Get good legal representation and don’t do it on your own. There are a lot of laws about how these agreements should work, and you need to protect yourself as a landlord.