Constructing rent-to-own (lease option) real estate deals for clients (or yourself) can be tricky. Below are the best 6 tips for putting them together successfully.
Option money (written in the contract as such and paid to the owner) should be used as down payment funds (remember to both source and document!). Monthly rent credits can be used to pay closing costs or reduce the purchase price of the home.
What about a security deposit? Typically, there isn’t one for several reasons. The first is that tenants only have so much money to put down (option fee, first month’s rent, moving expenses, etc.). The second is that the tenant should be treating the home well (and not destroying it), being that they entered into a contract to potentially buy it.
What about insurance? For the rent-to-own buyer, I always recommend renter’s insurance. It’s cheap (around $100 a year) and you’re really glad you have it when something goes wrong. For the seller, they just need to call their insurance provider and switch from a “homeowners” to a “landlord” policy. Typically, there is no price difference.
What about inspections? The blanket, conservative answer is to get them done prior to move-in and then the house sells “as-is” at closing. However, being that the tenant will be living in the home for a year or two and the owner is paying for any repairs above $500, you can look at this at a case-by-case basis. Broken things will be found out quickly while living there.
What about the much publicized “higher rental rates” you hear about that rent-to-own arrangements command? I don’t see evidence of this. Does this ever happen? Sure. Does it happen often in competitive markets? No. As an example, try to list your rental home for $200 above market rate as a “rent-to-own” and see what your response rate is. There are plenty of rent-to-own opportunities at market rate rent (or below).
What about paying for an appraisal prior to move-in? I think this is a waste of money. You can just use comps, negotiate the price, and then wait. When the tenant goes to buy the home, the bank will send an appraiser.