Typical Rent to Own Agreements?

**wincrasher** · 05-04-2010, 09:34 AM

You probably will have to give something on one point to get on another.

If you want such generous terms as 100% going to down payment, you'll probably have to give them their price. Most likely they will be factoring an interest cost into your payment, so you won't get 100% credit.

But anything is possible. Depends on market/house/etc. I'd assume since they are advertising rent or buy, then they are pretty "motivated".

Rent to own sounds like a good option to me as long as the monthly rent is in line with other rentals in your area. Should you change your mind in a year, you are no worse off than you are right now.

**ktmarvels** · 05-05-2010, 03:41 AM

Interesting topic. This is something DH and I may consider doing with our current house. Most likely we will be moving in the next year or so and we are debating between trying to sell the house or renting it out. I could potentially see us do something like you describe, our goal is for the renters to pay the mortgage anyway, and we have the income to cover it if necessary. However I would be hesitant to put 100% of your rent to the mortgage. If (when) you move out chances are the house would need updating, cleaning, or other maintenance. That's even if you are on the bill for all major repairs. Insurance is another thing to consider. They would still have to keep homeowners insurance and your renter's insurance wouldn't cover the house if anything happened to it. A lot to think about, I'm curious to see what you learn about this process!

**Scanner** · 05-06-2010, 01:30 PM

ktmarvels:

Well I did find some amount of literature on this on the internet and the one positive you have as an owner and me as a potential buyer is that more than likely I will try to keep the place nice vs. other renters, you know?

If I think I may be buying it I won't throw a college frat party every other night. So at the very least, you would just have normal wear and tear at the end if I didn't exercise my option to buy.

That being said, you are correct. . .the usual is something like 40% of the rent can go towards "purchase credit." So, if I pay $1000/month - $400 can go towards a "downpayment" towards an agreed upon price. If I don't buy at the end of the lease, you keep it all.

Of course, with this market I may be able to negotiate a 80% rent credit or something. You are getting the taxes paid on the property but you are losing any potential equity gain. Everything is negotiable.

Also, most rent-to-own terms state if I am 1 day late on the rent, I lose the credit for that month. So, writing post-dated checks probably makes sense.

**cicy33** · 05-10-2010, 02:08 PM

Originally posted by Scanner View Post

I know in a way there's nothing typical about any contract, that anything can be negotiated but here is my needs.

I am divorcing and will be needing a place of my own soon. I will have a decent enough payout if everything goes okay (about 60K, maybe another 20K saved up) but I am frankly not sure where I want to live.

Divorcing people are notoriously flakey and I am no different. A good friend advised me to NOT buy for a couple of years anyway and it's probably good advice.

I notice a house nearby that is FOR RENT and FOR SALE.

I only have the buyers perspective - I would like to pay rent and have it go 100% towards the equity with an option to leave. But as the seller. . .maybe bearing 100% of the risk, that I walk away after the lease is too much to bear.

Anyone ever do this as a buyer or seller?

Is the sale price usually open ended or close ended on these types of agreements?

Thanks in advance.

Okay, first and foremost. just because people get divorced does not make them flakey. it makes them human. and considering probably 60% of all people you meet have been divorced I would be careful about calling them names. Especially if you want someone to sell you a house on a contract.

Now on to the more pertinent information. I have bought three houses in my life on contract for deed. First, you will need a significant down payment. the amount you will need will depend on the cost of the house. and the requirements of the people you are buying from. No matter what you do the payment will NOT be 100% applied to the principal cost. it isn't even for people that actually buy a house using a bank. I mean think about it. Joe buys a house for 50,000. He finances it. He will probably pay the majority of his payments initially towards interest. that is just how it is. In the situation of buying a house this way you must understand and accept that you have no bargaining power. none. you are at their mercy. You are asking people to take the risk on your behalf. sort of like a bank. They also have to take the risk that you won't destroy the house in the process. Some people do. In my case there was an actual contract drawn up and I highly recommend it to protect both sides. the best thing you can do is to either try to buy something that is fairly cheap with the money you have saved, rent or talk to the people that are selling and see what their terms are. having references and a job are very important in these cases. they will want to check it. but above all they must trust you and believe that you are a good person and will treat their property well. In most cases you will be responsible for paying taxes and insurance on the home. It is n't easy but it can be done.

**Scanner** · 05-13-2010, 01:47 PM

Cicy,

First of all. . .I am sorry for the "flakey" comment - it was more self-deprecating humor vs. aimed at divorcees. I think all divorcess are kind of in la-la land during the first years of trying to rebuild - not sure what they are wanting. Nothing was meant by it other than making a purchase decisino may not be smart for me.

Second of all. . .I disagree with having no leverage.

The leverage is. . ."You no like? There are plenty of other houses out there. Next!!!!"

The leverage is it's a buyers market.

That being said, I do agree that it would be a golden deal I could arrange 100% credit towards principle. . .probably hard to do and I would concede to a 40-80% credit.

But no, I am not going to pay "rent" and taxes and insurnace on home (beyond renters insurance). That's a ludicrious suggestion and you and I arent' donig business and the house can sit vacant then and you can think about your decision every time taxes and insurance come due while tumbleweeds blow outside, waiting for that buyer to show up.

That's what I would be telling you as a potential lease/purchaser. And yes, I still think a lease/purchaser would take better care of a house vs. just a straight leaser.

But at the end of the lease I would still have to have a bank loan anyway to finance the difference between the "lease credit" + "extra savings" + "mortgage" = sales price.

I mean, I am just trying to comprehend why you say I have zero leverage? Yes, I get we are "sharing risk". ..but it also lets me see if the house is a lemon or not too as I would live in it for 2 years. The average house costs $4000-8000/year in taxes + insurance + any repairs. . .the longer it's not generating money, the more it is costing money. Not to mention the mortgage they may be floating.

Can you say money pit?

**b4freedom** · 05-13-2010, 06:00 PM

Do you know for a fact that the owner has 100% equity in the home?

If they do not, then there is ZERO chance you’ll be able to “rent to own” with 100% being applied to the principle.

It is unreasonable to ask for 100% of your rent to be applied to your principle because they have costs that need to be paid. Renting a house isn’t free. Selling a house isn’t free. If they give you 100% of rent paid to be used as a credit towards a future sale they will be left with 0% of rent paid to cover their costs.

What they are probably looking for is someone to buy it. Short of that, they’ll rent it. Short of that, they’ll probably do a “rent to own” deal.

The “rent to own” means that you pay rent and, as a separate transaction, you purchase the right to buy the house at a set price (called an option). The option has an expiration date (end of the lease period probably). You can pay for that option up front in a lump sum. Or, you can spread it out over the course of your lease period. In the event you spread it out over the course of the lease period they’ll probably say, “See, X% of your rent is going toward equity towards the house.” What is really going towards the purchase price of the house is extra amount you paid to purchase the option (and that’s assuming you use the option).

As a general rule, it’s a bad deal for the tenant.

**cicy33** · 05-13-2010, 08:03 PM

deleted, sorry duplicate

**cicy33** · 05-13-2010, 08:14 PM

Originally posted by Scanner View Post

Cicy,

First of all. . .I am sorry for the "flakey" comment - it was more self-deprecating humor vs. aimed at divorcees. I think all divorcess are kind of in la-la land during the first years of trying to rebuild - not sure what they are wanting. Nothing was meant by it other than making a purchase decisino may not be smart for me.

Second of all. . .I disagree with having no leverage.

The leverage is. . ."You no like? There are plenty of other houses out there. Next!!!!"

The leverage is it's a buyers market.

That being said, I do agree that it would be a golden deal I could arrange 100% credit towards principle. . .probably hard to do and I would concede to a 40-80% credit.

But no, I am not going to pay "rent" and taxes and insurnace on home (beyond renters insurance). That's a ludicrious suggestion and you and I arent' donig business and the house can sit vacant then and you can think about your decision every time taxes and insurance come due while tumbleweeds blow outside, waiting for that buyer to show up.

That's what I would be telling you as a potential lease/purchaser. And yes, I still think a lease/purchaser would take better care of a house vs. just a straight leaser.

But at the end of the lease I would still have to have a bank loan anyway to finance the difference between the "lease credit" + "extra savings" + "mortgage" = sales price.

I mean, I am just trying to comprehend why you say I have zero leverage? Yes, I get we are "sharing risk". ..but it also lets me see if the house is a lemon or not too as I would live in it for 2 years. The average house costs $4000-8000/year in taxes + insurance + any repairs. . .the longer it's not generating money, the more it is costing money. Not to mention the mortgage they may be floating.

Can you say money pit?

No worries about the divorce thing, but just to keep in mind when talking to prospective sellers. some are most likely they are selling due to a divorce.

Ok, what I mean by zero leverage is that you are offering one thing and one thing only. Your word. You might or might not have a down payment, even if you do unless it is significant (10,000 or more) the buyer is taking all the risk. Contract for deeds are actually pretty common. Unfortunately you see them mostly with slum lords. We have gotten really lucky. There is also a difference between buying a house on contract and leasing with option to purchase. Usually with leasing with option to purchase you and the seller agree that at the end of a specified time period XXXX amount that you have paid will go towards the sale of the house. My experience with this is it is usually about 50%. sometimes less. When you buy a house on contract for deed you are essentially the owner. You are responsible for all repairs, taxes, etc. You and the seller sit down and determine the terms of the sale. This is where I am saying you will only get to apply a certain amount of your payment to the principal. It is not much different than a bank. The first 3 to 5 years the majority of the payment one makes to a bank is about 80% interest in the beginning and of course declines as it goes. I have cut and pasted a scenario that shows the first year of payments of a 40,000 house with 7% interest over 10 years. Interest paid is 15,732.xx Note that in this case the interest amount per month initially is about 50%. However, chances are if your credit is bad you will not get a great rate like 7%. see the one below.
Date Payment Interes Pricipal paid Balance
May 2010
$40,000.00
June 2010 $464.43 $233.33 $231.10 $39,768.90
July 2010 $464.43 $231.99 $232.45 $39,536.45
August 2010 $464.43 $230.63 $233.80 $39,302.65
September 2010 $464.43 $229.27 $235.17 $39,067.48
October 2010 $464.43 $227.89 $236.54 $38,830.94
November 2010 $464.43 $226.51 $237.92 $38,593.02
December 2010 $464.43 $225.13 $239.31 $38,353.71
January 2011 $464.43 $223.73 $240.70 $38,113.01
February 2011 $464.43 $222.33 $242.11 $37,870.90
March 2011 $464.43 $220.91 $243.52 $37,627.38
April 2011 $464.43 $219.49 $244.94 $37,382.44
May 2011 $464.43 $218.06 $246.37 $37,136.07

here is the same numbers at 15% interest. note that the interest is now huge and the principal small. Interest on this paid will be 37,440.78 almost the cost of the house, now how that is 15% is beyond me! but that is what the mortgage chart shows. I guess it is because it is spread out?

Date Payment Interest Principal paid Balance
May 2010
$40,000.00
June 2010 $645.34 $500.00 $145.34 $39,854.66
July 2010 $645.34 $498.18 $147.16 $39,707.50
August 2010 $645.34 $496.34 $149.00 $39,558.51
September 2010 $645.34 $494.48 $150.86 $39,407.65
October 2010 $645.34 $492.60 $152.74 $39,254.90
November 2010 $645.34 $490.69 $154.65 $39,100.25
December 2010 $645.34 $488.75 $156.59 $38,943.66
January 2011 $645.34 $486.80 $158.54 $38,785.12
February 2011 $645.34 $484.81 $160.53 $38,624.59
March 2011 $645.34 $482.81 $162.53 $38,462.06
April 2011 $645.34 $480.78 $164.56 $38,297.50
May 2011 $645.34 $478.72 $166.62 $38,130.88

I got these from whats the cost. feel free to google it and try your own numbers. I only wanted to point out that whether you are going through a bank or a person the first couple of years are horrible when it comes to interest. Also whether you like it or not it is not a buyers market when it comes to financing it with the owner completely. They have the right to say no. It really depends upon their desperation. and often on the amount of the down payments. The reason that I also suggested getting it in writing and require proof of payments to their bank, is because I have heard of horror stories where one makes the required payments and the owner does not pay the bill and then the house is foreclosed on. sadly, the people that were buying the house usually don't have the money to take the people to court, not that it would help I am guessing.

I would also say that before you even talk to some of these people you put yourself in their place. You own a nice house but need to sell. You tried renting but they just messed up the place and cost you more money. So you decide to sell. Joe Buyer comes in and says, I have 2000 and I promise to pay you every month by the terms we set up. Mary Seller says, what happens if you don't? ANSWER: nothing. buyer can walk away and seller is out the promise. matter of fact in most contract for deeds agreement there is a clause that says if you don't pay after a certain period of time you just lose what you have in it. the seller however, has to pay any back taxes you didn't pay and fix whatever you broke or simply didn't repair when it broke down or whatever. and they have to start making the payments again. so yes, the seller is assuming the risk, just like a bank would. there really is no difference except who is holding the note.

**Scanner** · 05-14-2010, 12:43 PM

Cicy,

I didn't really understnad your post. I have good credit - just a very unstable life. Although you never know with banks being tight with lending, I am sure I can a prime loan when it comes time. I understand the concept of interest being front-end on a mortage and I have no idea if the house I had my eye on is in the first year, last year, or is totally paid off with regards to the mortgage.

Truthfully, if it's owned outright I suppose the owner is less under the gun to sell. . .just has to keep the taxes up and keep minimal maintenance.

I do think you presented an interesting conundrum. Let's say I 'Lease/purchase" and he doesn't pay the mortgage and I thought I was getting $15,000 credit towards the purchase of the house at the end. Do I have the right to apply a lien on the foreclosed house and the owner was "negligent" on his deal?

Very good legal question - I am not sure. A contract is generally binding and I would think I am building "equity" in that house by him applying a certain amount. OF course, the bank would hold primary possession but I may be able to put a lien on the house in court.

Anyway, it all comes down to the resolve of each party. If it's not a motivated seller or renter, then no, they would want either a. or b, not a to b.

**cicy33** · 05-14-2010, 04:44 PM

I would say that then what you are wanting is to lease with the option to think about buying, right? you are just not sure if you are ready to buy but want that option there in the background. otherwise with buying I would always rather go through a bank if you have good credit. mine is not great now. but it is under construction. lol I am not sure about your question either. I don't know how that would work since they would not own the house any longer. The bank would get it back and they would never have received the moneys that were agreed upon. My guess honestly is that you would have to fight the original owner in small claims court.

Typical Rent to Own Agreements?