If you are a SELLER you will RENT-TO-SELL, a BUYER will RENT-TO-BUY, however the whole process is considered a RENT-TO-OWN or a LEASE OPTION.
Q: How does the rent-to-own process work?
Answer: On the owner side, if you decide you want us to market for a tenant-buyer for your property, please complete our PROPERTY INFORMATION SHEET (click to download). This provides us the information we’ll need and gives us an idea of the current condition of the property along with any special features to include in the marketing.
You can fax the document to us at 248-295-4825 or scan and email it to firstname.lastname@example.org.
Once we receive the Property Information Sheet, we will contact you to go over marketing your property. Once all of your questions are answered and everything is a go, we’ll send you our NON-EXCLUSIVE Tenant Placement Agreement via HelloSign for quick & easy electronic signature. Again, the document is non-exclusive (you can keep marketing your home however you like). It simply gives us the legal authorization to market your property.
From the Tenant-Buyer side, the process works as follows:
Q: How do we decide on an option price?
Answer: We do a comparable sales analysis to determine the property’s current max value. We’ll be sure to discuss with you any special features of your home in comparison to the surrounding homes nearby. We will provide you our assessment of the highest value we think the property could appraise for in today’s market. As you are aware, your tenant-buyer will be getting a home loan to purchase your property and the lender will require that the property appraise for at least the option price.
Q: What happens if the property does not appraise for the option price?
Answer: If it does not appraise, you have the following options:
Q: How do we decide on a monthly lease payment?
Answer: We usually recommend either the market rent or what we refer to as “mortgage rent”, whichever is higher. “Mortgage rent” is the monthly amount estimated for a typical mortgage payment for the property at the option price including taxes and insurance. In most circumstance, market rent is higher.
Q: Why should I offer a “rent credit”?
Answer: Offering a “rent credit” gives the tenant-buyer a powerful incentive to pay their rent on the 1st of every month (not the 2nd, 3rd or thereafter). It also is a strong monthly reminder that they are regularly continuing to invest in what will be their future asset. Any “rent credit” does NOT affect your monthly cash-flow. The credit is NOT taken out of the monthly rent, nor is it something you should set aside each month. The tenant-buyer is still paying the full month’s rent each month. The “rent credit” is only calculated at CLOSING only when they go to exercise their option. The accumulated credit can then be applied at closing either as a reduction in option price or as a contribution/subsidy for closing costs (in today’s lending environment, it is highly unlikely that the lender will allow this “rent credit” to count as part of their down payment). Most sellers typically offer a “rent credit” somewhere around 5-15% of the monthly rate with a minimum of $100.00. So in the example of offering $100.00 per month, assuming the tenant-buyer paid all their rent on the 1st of each month and they exercised their option at month 10, you the owner would either reduce the option price by $1,000.00 OR contribute $1,000.00 towards their closing costs ($100.00 x 10 months = $1,000.00).
Q: If the Option Down Payment/Option Fee the tenant/buyer pays goes towards your compensation, how is the owner protected in event the tenant-buyer causes property damage?
Answer: The contracts make the tenant-buyer fully and financially responsible for all repairs and maintenance beyond normal wear & tear AND responsible for all repairs and maintenance up to a certain dollar amount (usually $100.00) for each repair item. Keep in mind the option fee/option down payment is NOT refundable (unless you breach the contract). We have never had a tenant-buyer who put down at least 3.5% of the option price from their own funds do anything (like damage a property) to jeopardize that investment. A tenant-buyer is truly a different caliber of person than a typical renter.
Sometimes, typically due to unforeseen circumstances, there are tenant-buyers who do not exercise their option and hence vacate the property. Most times they leave the house in excellent condition, and many have even completed improvements to the home leaving the owner with an improved property! We do a thorough back ground, employment and rental history check for best efforts to place the best of the best tenant-buyers.
Finally, it is tough for tenant-buyers to come up with the option fee/option down payment, PLUS full first month’s rent, PLUS a security deposit prior to move in. A better solution to handle maintenance and care of the property, one we strongly recommend, is for the owner to provide for a home warranty for the first year. The tenant-buyer pays the deductible when the home warranty company sends out a contractor to do the repair. If they can’t fix it then they replace it for no additional cost outside the deductible! Click here to see the coverage on the home warranty we recommend which is either $455 or $495 (depending on the deductible) for the ENTIRE YEAR unless you want to add some optional additional coverages as described in the home warranty brochure. A home warranty is the most economical way for the tenant-buyer to be responsible for repairs and maintenance. An added bonus is that you don’t have to be the “middle man” as the tenant-buyer contacts the home warranty directly and pays the vendor the deductible directly. The typical deductible can be either $75.00 or $100.00.
Q: How is the Option Down Payment transferred to the buyer at closing?
Answer: The tenant-buyer is required to put their option fee/option down payment in a third party escrow account. Once all parties sign contracts the funds are RELEASED from escrow. Please note that funds do not “sit” in escrow long-term. When the tenant-buyer is ready to exercise their option later down the road, they will already have all the documentation needed to provide evidence of their option down payment to their lender or mortgage broker. Sometimes loan underwriting may require a statement of account from the escrow company which is very easily obtained by the escrow company. Lenders just need to see that the option down payment/option fee is “seasoned” (usually for at least 60 days) and “sourced” (came from the buyer). Once the funds are confirmed, the amount the tenant-buyer put down for their option is simply reflected on the HUD closing statement as a line item usually as an earnest money deposit (EMD). In other words, the actual funds do not have to be produced at the time of closing as it’s all accounted for accordingly on the closing statement.
Q: Is the option fee/down payment just applied to the contract price?
Answer: The option fee/option down payment is strictly and solely to be considered as a down payment on the property and is applied to the contract price at closing. However, if the tenant-buyer put more than the minimum down payment required by their lender (usually 3.5%), and say put 5% down…the tenant-buyer could satisfy the 3.5% minimum and use the remaining 1.5% to pay for their closing costs.
Q: What percentage of your tenant-buyers actually end up exercising their option?
Answer: On average approximately 80% of our tenant-buyers go on to exercise their option. About 20% of those needed an extension beyond the initial term. This is why we now start off the initial terms to be at 18 months rather than 12 months.
You may find that stats for other companies are far lower, so much lower that many times people find our stats hard to believe. We’ve talked to quite a few similar companies and individuals out there over the years and find that, for the most part, owners sign contracts with the first person who has some decent cash to put down without giving careful consideration to the tenant-buyer’s ultimate goals, finances, credit, etc. Either that or they attempt to convert a traditional renter into a tenant-buyer. Essentially, in both cases, the screening and pre-qualifying is minimal at best. We make it an explicit point NOT to do business this way for a number of reasons…most importantly, this is not in either the tenant-buyer’s nor the owner’s best interest! We don’t consider it good business to depend on luck or happenstance for the sake of a speedy placement when there are so many smart and effective ways to increase the odds of ultimately accomplishing everyone’s goals.
Q: What are the benefits to the Rent-To-Own model?
Answer: Probably the biggest benefit to the owner is their NETTING considerably more in exchange for the flexibility they offer with rent-to-own. We find that our owners NET at closing an average of 20% or MORE than they would have selling the property through traditional methods. With our tenant-buyers, there are no low-ball offers (up to 4+% average), there is no demand for “seller help” (up to 6%), they pay all closing costs (~2%), no out-of-pocket inspection repairs (1% average), and there are no commissions (up to 7%) to be paid when they buy (unless you choose to have an agent involved which is fine with us).
And finally, the owner has a family living and caring for their property to a much higher standard than that of a typical renter. A much better option especially if the owner was willing to rent the property out as a last resort anyway.
We hope the Answers to these Frequently Asked Questions helped give you confidence our Rent-To-Sell Program.
Once again, if you decide you would like us to begin marketing to place a tenant-buyer into your property, please see our PROPERTY INFORMATION SHEET (click to download), and either fax to us at 248-295-4825, or scan and email to email@example.com. We look forward to working with you!