A lease-to-own option provides a quick and easy way to sell your house
Besides serving a buyer who can’t quite get traditional financing in place before they need to purchase a house, the seller benefits as well.
- The buyer pays an upfront fee, somewhere in the neighborhood of 5%.
- The seller can set a higher asking price of the house than you’d get with a conventional sale.
- Seller receives regular payments, which provides monthly cash flow.
- Neither party pays a REALTOR®.
- If the buyer decides not to buy, the seller may keep all money, including payments and the deposit.
Here’s the deal. Renting your house to someone through a “lease to own” option comes with the understanding that they’ll complete the option in a couple of years. After they’ve improved their credit somewhat and been approved for a conventional mortgage, then they buy it for a lump sum. Payday for you! Home ownership dream-come-true for them!
The successful lease-to own transaction hinges on two major factors: the responsibility of the buyer AND the seller.
Pre-qualifying your buyer means you won’t have to worry about them not being able to afford your house in two years. Naturally, you want to get paid. The lease-to-own contract assumes you are planning on letting go of the house after a certain number of months. It is your absolute intention to sell it, because you are planning to retire, purchase another house, or use the money for any number of other things. If you choose a buyer who doesn’t have a plan for obtaining other financing, then all of your planning is wasted. Don’t risk your future to someone who can’t be trusted. Due diligence is not only necessary…you must follow through on your findings.
Another consideration is that you may risk getting a reputation for being an unfair lender, and/or open yourself up for a lawsuit. If your buyer can’t pay off the amount after your set amount of time, they may feel like they’ve been swindled or cheated. Then they may turn the blame on you. If you go into the deal feeling like you are “helping someone out” by leasing with the intent to sell it to the “buyer/tenant” later on, you may inadvertently invite accusations of being a crooked investor with the wrong intentions.
Remember that this is a business deal. I’ve seen too many sellers wind up having a bad experience and wishing they had just sold their house for cash to another investor, or simply put it on the market with the help of a REALTOR®. Rent-to-own deals are not for everyone.
On the buyer’s side, the same thing applies, just in a different fashion. If your seller doesn’t check your credentials carefully, you could be dealing with an unscrupulous investor. Study your contract and make sure you understand what each section means. If you only qualify for a $200,000 house — and you can reasonably assume that in two years, a mortgage company would grant you a loan for that much — then don’t negotiate a contract for more than that amount. A $400,000 house may seem do-able, until the time comes to actually buy it. If you can’t get a loan for it after your terms are up, the seller can keep all your money, including monthly and down payments. You’ll be right back where you started, only two years older, and deeper in debt.
Know what you can afford and stick to that number. For all the benefits of a lease to own deal, it’s definitely NOT worth it if you’re looking at more house than you can afford or working with someone who doesn’t seem to know what they are doing.
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Photo Credit CC: Limestone Investments