Using a lease option or rent to own type of sales strategy is a very creative way of selling your house in a down market or when lending guidelines have tightened. A seller can typically get a higher asking price while avoiding the disadvantages of being a landlord.
Some of the variations you may have heard that have the same general concept are:
- Lease To Buy,
- Rent To Own,
- Lease To Own,
- Lease Option,
- Rent To Buy.
- Lease Purchase.
Essentially, the seller is leasing the house while giving the buyer the “option” to buy the house at a future date, for an already agreed-upon sales price. Meanwhile, the buyer is responsible for all maintenance and repairs.
The advantages of a rent to own transaction:
- The seller can ask for a 3 – 5% option payment upfront that will be applied to the buyer’s down payment, if they decide to exercise their option to buy. The deposit is consequently non-refundable if they choose not to buy.
- The seller can charge a higher premium on the rent and then use that premium to apply to the buyer’s down payment as “purchase credits.” If the buyer chooses not to exercise their option to buy, these purchase credits are non-refundable.
For example, a rent of $1200/mth could turn into $1350/mth. As a result, the buyer then receives $150 monthly credit that will be applied to the down payment at the time of their refinance.
- Higher asking price.
- No closing costs.
- Simpler eviction process if buyer stops making rent payments.
- Faster home sale.
- Could help improve seller’s credit.
- Typically low or no real estate commissions.
The main disadvantage of a rent to own process:
- If the buyer stops making payments, the seller will get the house back.
- Almost all states have strict laws dictating how the transaction can be structured. If not structured correctly, the consequences to the seller are severe.