So you’ve had your Indianapolis home on the market for months and it still hasn’t sold. You need to move for that new job but you can’t afford 2 mortgages. What do you do? Many people in the same predicament have moved on with their lives by selling their house with a rent to own method. Also called a lease-to-own, there are different types sellers can choose from. The 2 most common forms are the lease option and the lease purchase option.
With a lease option the buyer is not obligated to purchase the property. However, it does allow them to use the property as a tenant with an option to buy. Lease options are designed for potential buyers who do not have good enough credit to qualify for a mortgage or do not have enough savings for a down payment. With this rent to own method, the buyer rents the property in the hopes of purchasing it in the future. Rents are usually greater than market, with a part of that rent reducing the price of the house, making it easier for the purchaser to qualify for a loan when and if the tenant decides to exercise the purchase option. Because the rents are higher than market, the seller continues to pay for home maintenance and any repairs. No other purchaser can buy the property while it is being rented, and if the purchase option is not exercised, all rent money is kept by the seller. Depending on negotiations, the purchase price can be market or some estimated future value.
In a lease purchase option, the buyer rents the property but is required to purchase the property before the option period expires. With this rent to own method, unlike a lease option, the buyer is the one who is responsible to pay for any home maintenance and repairs. Because of this, the monthly rents are lower than rents with a lease option. Sellers usually negotiate a purchase price that is higher than current market value. Buyers will usually have to pay a negotiable percetage of the price of the house for the option that is not considered part of the down payment and is not refundable if the buyer defaults on the contract. These rent to own buyers are required to try to get a mortgage loan before the purchase date. Before that time, no other buyer may purchase the property unless the renter cannot get financing and defaults on the contract.
Drawbacks to rent to own:
- Depending on the agreement, a renter can just walk away if he finds something seriously wrong with your house. Although he will lose the option fee and all his rent credit money, that amount will be much less than if he had just bought the house outright and tried to leave it later.
- A large percentage of options are not exercised. This is a risk for you if your ultimate goal is to sell your house.
- These options are appealing to young, first-time buyers who do not have the income to buy the property or qualify for a mortgage. Very often, these financial difficulties are not solved during the option period, and they can even be made worse in the face of higher-than-average monthly rental payments.
- There’s a risk of the renter simply deciding not to buying your house at lease’s end, making you go through the whole listing process all over again
- Your tenant/buyer could also get the upper hand (and you, the disadvantage) if the value of your house rises more than you expect it to. For example, let’s say your house is currently valued at $150,000 and your tenant/buyer agrees to a price of $160,000 at the end of the option. If the house ends up worth $180,000 in three years, you will lose that extra $20,000.
- If a new buyer tells you he wants to purchase the house for a higher price, you are out of luck. You entered into a contract with your tenant/buyer and you have to abide by it.
- Many sellers use the rent they earn to pay the existing mortgage on their old home, which eases their financial burden. If your tenant/buyer cannot make payments, you might not be able to afford to pay both your old and new mortgages, which could force you into a foreclosure.
A better way:
There is a much better solution than rent to own for sellers who cannot sell their homes. This solution is called “Subject-to” and we facilitate it for sellers free of charge. To find out more about subject-to owner financing and our free service we offer to sellers like you, CLICK HERE.