How To Make Money With Lease To Own Homes
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How To Make Money With Lease To Own Homes
The popularity of lease-to-own (also known as rent-to-own) has exploded over the past few years. This has been very common around large cities where the price of housing may have increased exponentially while salaries or lending has not kept up.
Individuals who want to purchase a home but can’t immediately afford the down payment, can find this option exciting. As an owner, this can be quite lucrative.
In this article, we will explore the basics of lease-to-own homes. It will cover the ins and outs of what this service is, the benefits of using this approach, and some tips that you should know as an owner. This comprehensive article will teach you everything you need to know on how to make money with lease to own homes.
What Is A Lease-To-Own Home?
A lease-to-own home is a house where a potential buyer can purchase it through a rent-to-own agreement. This type of contract means that he or she will rent the property for an agreed period before gaining its ownership. Take note that the time may vary depending on the contract specifics. Some take several months for them to own the house while others take years.
This process allows the tenants to save up for the required payment and continuously build their credit while settling down on the said house. They don’t have to wait just to step foot on their dream home.
How Does The Lease-To-Own Process Work?
There are different strategies when it comes to the lease-to-own process. However, the essential components of this approach are as follows:
As stated in the contract, you, as the seller, should collect a certain rent amount per month. Keep in mind that you should set a higher amount in this setup as compared to the other rent prices in the area. The reason for this is that a percentage of the monthly payment should be set aside as a credit for the buyer’s future purchase of the house.
For example, if typical rent is $2000/month in your area, you could charge $2300 per month, and have $300/mo go towards the purchase price of the home.
The purchase price is one of the most important details in a lease-to-own contract. You should determine the amount based on the house’s current market value or its predicted value on the time the contract will end. There are instances that the current price is used once you and your buyer sign the contract. In other situations, however, the amount will be decided upon once the lease is months away from its expiration.
In a growing market, it is customary to see what the housing growth has been over the past 4 years and use that average to reprice the home. For example, if your home is worth $400K today but the average increase has been 2% year over year and the buyer has the option to purchase the home in 3 years, then you should a compounding 2% for 3 years to the price of the home.
What’s unique about the lease-to-own agreement is the presence of the options money. You should require the buyer to pay you a one-time nonrefundable fee that you will give them the exclusivity and opportunity to buy the house. In return, however, you should put this amount towards the buyer’s home equity upon the fulfillment of your contract.
Remember that there is no standard percentage cut for the Option Money. What most owners do is that they based it on a 2.5 to 7 percent range of the home’s purchase price.
Lease-Purchase VS Lease-Option
Lease-purchase and lease-option are two very different things. Therefore, when drafting the contract, you and your buyer need to decide on which setup you will go for.
For lease-option contracts, you give your tenants the right to buy your home upon the expiration of the lease. However, there is no obligation for them to do so. It’s up to them whether they want to continue paying the rent or buying the house once the option expires. Take note that both parties do not owe anything to the other after the end of their agreement.
On the other hand, lease-purchase contracts are more binding in nature. In this kind of approach, you obligate the buyer to purchase the house upon contract expiration, whether they can afford it or not. This means that you have a hold of them. So, when is the time that you will decide to apply the lease-purchase agreement?
You may opt to stay with this approach if your buyers want exclusivity to your home. This entails that as the seller, you are not given the freedom to offer the house to anyone else because these potential buyers are dedicated to grabbing this sale. The lease-purchase gives them a binding agreement that in return of the seller not looking for a back-up buyer, the people he or she is transacting with should assure him or her that the house will be sold in the end.
With these different terminologies floating around, both the buyer and the seller need to ask the assistance of qualified real estate attorneys. Their goal is to review the contract to make sure that everything is well and fair. These professionals should also take up the responsibility of explaining the rights and obligations of both parties to avoid any misunderstandings along the way.
Rent-To-Own Home Maintenance
Upon drafting the contract, both sides should decide who is in-charge of home maintenance. On most occasions, however, the seller carries the burden of this responsibility. Since you are the main one in-charge of any homeowner association fees, insurance, and taxes, it only makes sense that you also handle the costs of the home maintenance.
As the owner, you should make sure that the repairs and maintenance requirements are mentioned and stated in the contract. Some of the tasks you can shoulder include fixing the electric wires, having the home inspected, or replacing the damaged roof or ceiling. Do not commit to some menial tasks such as cleaning the gutters, raking the leaves, fixing toilets, changing light bulbs or mowing the lawn. These tasks should not be included in your list, for these are everyday house responsibilities.
There are instances, however, that the seller requires the tenants to shoulder the responsibility of maintenance and repairs. The reason behind this is that these individuals plan on owning this house in the near future. Therefore, they should be given the responsibility to take care of their space to prepare them for owning the home.
Benefits Of Lease-To-Own Programs To Sellers
Tenants Treat Houses Better
If you’re just offering your house for rent, there is a chance for your tenants to disregard the functionality and beauty of your home. They won’t care that much whether they’re cleaning the house well since it’s not their property in the first place. They’re just renting it out for a short period. Basically, they do not take accountability and responsibility because their mindset is that they do not own the place themselves.
This is contrary to what happens in lease-to-own setups. While it’s not 100 percent true, most tenants in this living condition treat the house with more care because they are under the assumption that it will be their home soon. If they’re not careful with both the insides and outsides of the house, they might only shoulder the repair costs in the future.
Some sellers revealed that most tenants in this program are better in cleaning, have higher repair craftsmanship, and have better and responsible choices. A few of them put rules for the people in the house to follow. For example, some tenants do not allow drinking or eating in the living room, or they require everyone entering the house to remove their shoes. These are simple rules that actually contribute to the cleanliness and orderliness of the household.
No Agent Commission On The Sale
Whenever you sell a house, the average rate for the cut of real estate agents ranges around 6 to 7 percent on average. That’s a lot of money, especially that the price of houses usually falls on a 6-digit value. For instance, you sell a home worth $300,000; your real estate agent will receive approximately $18,000 for his or her commission. That’s a lot of money, right?
However, if you find a buyer yourself, you’ll be able to keep this large amount. You don’t have to set aside money since you won’t need to avail of the services of real estate agents.
More On-Time Payments
Since you imposed a fair yet hefty “option fee” on your tenants, they tend to pay their monthly fees on time. The reason behind this is that they have to make sure that they have enough accumulated equity for each month so that they’ll have enough money for their future downpayment.
To make sure that you won’t be able to receive payments, you may put a clause in your contract stating that their equity will only be added into their account if they don’t pay it late. If they miss the deadline, this portion of their payment will only be considered as their penalty instead of being set aside as their downpayment.
Fewer Turnover Costs
A lease-to-own tenant has a very different mindset compared to a plain renter. Basically, they want to be the owners of the house in the future. This means that the won’t most likely leave the town or quickly move away from this space. If they continuously stay in your rented space, you won’t have to worry about the vacancy costs. Your contract with your current tenant will secure you with your income in a certain period.
As mentioned above, once you offer a property in a lease-to-own agreement, you will instantly receive an up-front option payment. What’s good about this deal is that it is nonrefundable and high. The amount can range from $3,000 up to $10,000 for every transaction – some even exceed this. This is an extra income aside from the monthly rental fees you collect from your tenant.
Huge Opportunity In This Decade
Are you aware that the generation with the most significant potential in home buying are millennials? These are individuals that have graduated in college and are in their 20s and 30s. They are a massive potential market for lease-to-own as the majority of millennials are just looking for rental properties. The primary reason behind this is that more than half of them cannot qualify for a loan.
Millenials are struggling with high debt from school and cost of living and are now trying to settle down with kids. This is a huge opportunity for property owners to capitalize on through rent-to-own.
Major Pitfalls In A Lease-To-Own Setups
As a seller, there are potential risks that you need to watch out for. Here are some of the major pitfalls that you should avoid.
No Legal Help
Your contract with your tenant will be the most important document between the two of you. You have to make sure that everything written down on this paper is fair and clear for both parties. Make sure there are no legal loop holes in the clauses, and that you understand the meaning behind all the jargon and technical terms.
Ensure that your lawyer is also familiar with the property and rental laws in your state or province so that there wont be complications in the end.
Here are some of the things that you should consider placing in your contract.
- The specific start date and end date of the contract
- Payment deadlines (day and details where it will be paid)
- The amount of both the rent payments and the option fee
- The specific percentage of the rent payment which will be set aside for the purchase price
- The technicalities of how the purchase price was determined
- Whether pets are allowed in the property or not
- The party is responsible for property taxes, repairs, and maintenance, homeowner association dues, etc.
Choosing A Bad Tenant
It’s not enough that your tenant will agree with all of your terms and conditions. Do not rely on first impressions. As the seller, it is your duty to look closely into the situation and know the person you are transacting with by researching them carefully.
Make sure to look at where they have lived before, where they currently reside, their family members, and whether their jobs are stable enough for them to afford the payments. It is also an excellent decision to talk to their previous landlords so that you’ll know how they are as tenants. Ask about their payment habits, how they communicate with them, and how much they have taken care of the landlord’s property.
In fact, you may even visit where they currently live so that you’ll have a first-hand idea of how they maintain their property. How they treat this will most likely be their behavior in managing your house.
Also speak to their employer and a few references so you can be sure of the type of tenant you’re getting. Remember, this person will be living in your house until they purchase it. You don’t want them to destroy it or miss payments that you’re owed.
Low Down Payment Or Options Fee
Do not set a low down payment or options fee amount so that you can find your tenant quickly. Instead, you may establish a price higher than what an individual will be putting down as a deposit payment on an average rental. It’s also up to you whether you’ll be setting a slightly higher options fee amount so that you’ll know whether he or she is capable of paying the monthly rent.
Not Divulging The Real State Of The Property
As the seller, it is your responsibility to check out the real status of your property and divulge the right information to your potential buyers. Do not keep anything from them just to get the sale. It can be both risky and costly to hide important information to new buyers. Why is that?
For example, the tenant decides to rent the property and sign a contract. Once he or she moves in the house, he or she discovers that a few items you discussed were not true. He can sue you for his down payment back get you and the property tied up for years in legal proceedings. If he just leaves, then you stuck having to find new tenants and have lost significant time (and therefore potential rent).
Lease-To-Own: A Winning Situation For You
A lease-to-own agreement is a winning situation for a seller like since it can lock in the highest and most reasonable sales price without having to pay real estate fees. Another thing to think about is this: whether the tenant buys the house or not, the seller still wins. Why?
If your current tenant ends up buying your home, the seller wins since you were able to make the sale. On the other hand, if the renter decides to pass up with your offer and moves out, you still have the advantage because you get to keep the option fee. You also were able to profit from the rental payment your tenant gives you every month. After moving out, you can re-do this lease-to-own terms with another tenant again to be able to earn more money.
All in all, the seller faces less risk in a lease-to-own program as compared to a usual renting approach or a direct house sell.
To know more about how the lease-to-own system works, you may check out Seth Asare’s book entitled Rent To Own Homes: Your Rent To Own Guide To Buying A Home, Selling A House, and Controlling Real Estate Using Lease Purchase Agreement.