Rent to own homes, also known as a lease option, is one of the unique strategies used in the real estate investing world, and it allows both the buyer and the seller to enjoy a win-win situation.
So, what is a “rent to own homes” agreement? What are its advantages to both the buyer and the seller? And how can you make a profit from using it?
Let’s explore!
Rent to Own Homes: What is it?
The “rent to own homes” strategy in the real estate investing world is, basically, a lease agreement between a homeowner (seller) and prospective tenants (buyers) that allows the tenants to rent a property for a set amount of time before purchasing the property and claiming ownership. The rent to own homes agreement, also known as a lease option, states that the seller agrees to sell the house to the signing tenants within an agreed upon period of time during which the seller cannot place the property back on the market for sale until the tenants purchase the house, or until the lease is broken by either party.
Rent to Own Homes: How does it work?
The way rent to own homes work is as follows:
Imagine a newly married couple who have not yet established themselves financially to acquire a mortgage and pay a down payment towards purchasing and owning a home. In this situation, the couple would sign an agreement with the seller stating that they will rent the place for a set period of time, three years for example, until they have improved their financial situation and have saved enough money for a down payment, and until they have stabilized their income to be able to acquire a mortgage loan.
In this case, an option agreement is signed between the seller and the potential buyers to take the property off the market and reserve it for the tenants to purchase it in the future. This option agreement could either be the same lease used to rent out the property, or it could be a separate agreement from the lease. Either way, the agreement should state that the seller cannot sell the property to anyone else within the timeframe that has been agreed upon.
In a “rent to own homes” agreement, the tenants would have to pay an option fee, which is typically based on the value of the home, and which counts towards the down payment at the time of the purchase. Additionally, a portion of the rent that the tenants pay will also count towards their ownership of the home. These payments are not refundable in case the tenants change their mind or in case the lease is broken.
Rent to Own Homes: Why do tenants use it?
So, what’s in it for the tenants?
The rent to own homes agreement allows the tenants to benefit from having a place to live in through a rent, while also paying towards the down payment for the purchase of the house. This strategy also allows the tenants the time to establish themselves financially and save up enough money to purchase the house, while also making sure that no one can compete with them for the ownership of the house, meaning that the price won’t go up within the time period of the lease and that they won’t be losing their dream house.
Related: 8 Types of Tenants to Beware of When You Rent Out Your Property
It also allows the tenants to immediately move into the house of their dreams without having to wait until they have saved enough money to buy it, allowing them to treat the house as their own property before even owning it.
Rent to Own Homes: What are the benefits for the seller?
So, what are the benefits for the seller of the house, and how can this be used as a real estate investment?
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The Option Fee
One of the ways through which the seller could profit from the “rent to own homes” strategy is through the option fee. The option fee is an amount of money paid by the tenants upon signing the agreement. This fee could range between $2,000 and $5,000, depending on the value of the house, and it is non-refundable in case the agreement is broken or the tenants change their minds.
This fee allows the seller to make a slight burst of profit as soon as the tenants move in, while also enjoying the rental income that the tenants would start paying afterward.
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A Guaranteed Sale
The rent to own homes strategy also allows the seller to enjoy the benefits of rental income for the duration of the lease, which gives his/her a guarantee that the house won’t go vacant for the duration, while also making sure that within a certain timeframe his/her property will be sold.
This means that the seller will guarantee that his/her investment property is actually succeeding in both being rented out and being sold with a single agreement, giving him/her a sense of security for the investment.
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Sharing the Load
Since the tenants have already decided on owning the home that they are renting, they will typically start treating it as their own home, maintaining the property and taking care of it as if it was their own (because it will be). This means that the tenants will be contributing towards any repair and maintenance costs on the property, and they will be far less likely to cause any damages to what would be their future home.
Related: 7 Ways to Keep Income Property Tenants Happy
Additionally, tenants who sign a rent to own homes agreement are less likely to move out of the house. And in case that they do, the seller would still have benefited from the rent that he/she has acquired during the tenants’ stay, as well as the option fee that they paid when they first signed the agreement.
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No Agent Fee
A typical rent to own homes strategy does not require the seller to hire a real estate agent to find a buyer for the home. This eliminates the extra fee that would have been otherwise paid to the agent for finding a buyer, allowing the seller to make a higher profit than in a typical sale.
Bottom Line
A “rent to own homes” strategy is the ultimate win-win situation on two levels. Firstly, it is a win for both the seller and the buyers since they both get certain advantages from the purchase. The seller is guaranteed to rent out the home for the duration, and is guaranteed to sell it after a certain amount of time, in addition to earning a profit through the option fee, while the buyers are guaranteed that they won’t lose the home they’re trying to purchase, while also using the time to establish themselves financially.
Related: Lease to Own Option and its Pros and Cons for Buyers and Sellers
Secondly, in case the lease is broken, the seller would still make a profit through the option fee as well as through the portion of the rent which was supposed to go towards the down payment (which is also non-refundable), which allows the seller to find a new buyer without suffering an income loss in the process.
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