Rent to Own Pitfalls
Posted 02-17-2015 at 10:22 AM by PAHouseLink
If you found this article via a search, I’m guessing you won’t be happy with what I’m about to tell you.
However, if you’re a Buyer, looking to do a Rent to Own, I’ll guarantee I’ll save you some money & angst, and if you are a Seller/Landlord I may be able to help fend off potential future litigation – either way, its good info that anyone looking to do a Rent to Own should know.
Let’s start out with the premise; on the outside, Rent to Own sounds like it has promise for both Buyers & Sellers, right?
Seriously, I get to “live” in your place, pay you “rent”, then sometime in the future I own it? (ohh wait, isn’t that the same as getting a mortgage and paying that mortgage off – rhetorical question?)
[IMG]http://www.pahouselink.com/images/rent_to_own.jpg[/IMG]
Obviously, the term “Rent to Own” is, and can be, interpreted in an infinite number of ways - and trust me, it is.
This brings us to the core of the problem; Terminology! The terminology is wrong from the get-go. You can’t RENT a place, then sometime in the future, own it – there has to be a sale and transfer of title before the “OWN” part happens (most of the time) and if you are only paying someone fair-market-value for rent then the OWN part never materializes.
Now I know what you’re thinking; hey hey, how about if I pay fair-market-value for rent, then pay [B]“something”[/B] over and above that amount every month thus building up a reserve I could use in the future as, say a down payment??
[B]Great idea – [I]FAULTY thinking!![/I][/B]
And here’s why [I](Sellers/Landlords pay attention here)[/I]; we’ll use an example:...
[INDENT]Sally’s been renting her condo unit for the last two years at $800 a month and has decided it’s time to buy a place of her own. She really likes her condo and figures she’ll approach her landlord and asks if he would be willing to sell it to him.
Sally calls Billy (landlord) and asks him if he’d be interested in selling. Billy, being the shrewd investor he is, realizes, that if he doesn’t sell to Sally and she moves, he will not only need to fix-up, repair, paint and recarpet the place but will also need to find another Sally (tenant).
So Billy suggest to Sally that they do a Rent-to-Own agreement where, for the next two years, Sally continues to rent the condo unit at $1,300 a month and at the end of two years she will have accumulated $12,000 to use as a down payment (check my math, $1,300-$800 (current rent payment) = $500 x 24 months = $12,000) to purchase the unit.
Of course, if Sally doesn’t want to purchase the property after 24 months then Billy (shrewd investor) gets to keep the money for his “time & aggravation”!
Now, in a perfect world, everything works out; Sally builds up a nice down payment, Billy continues to collect rent and gets an additional $500 bucks a month as “security” and doesn’t have to worry about Sally leaving for two years – right?
[b]Here’s the problem; we do not live in a perfect world![/b]
Long about month 23 Sally gets a huge job promotion and needs to relocate to another state – now what?
Obviously Billy is ecstatic (not for Sally’s promotion but) because he gets to pocket an additional $11,500 in profit – he is an Investor genius, ya know.
Sally’s not so happy (she was happy about the promotion but not about losing $11,500 bucks!) She could still purchase the condo and rent it out but she’ll be living out-of-state and trying to manage a property and a new job really doesn’t make sense.
Of course Sally has friends; one of whom knows a little about Real Estate law and suggests to Sally that, she may not have been paying an extra $500 per month in extra rent but, in-fact, may have been buying her condo $500 bucks at a time and she now has an [b][URL="http://en.wikipedia.org/wiki/Equitable_interest"]Euitable Interest[/URL][/B] in the unit.
[/INDENT]
Bottom line, Sally [B][I][U]may[/U][/I][/B] already own $11,500 worth of condo!
Again, I know what you’re thinking, but here’s the reality; the only way this is getting resolved is in court and, if you don’t already know this, the only winners in a court battle are the Attorneys!
So, the question is: Is there a valid way to structure a Rent to Own agreement? And the answer is yes but you’ll need to read my next blog post to learn how.
----------------------------------------------------------------------------------------------
Link to my [URL="http://www.pahouselink.com/disclaimer/"]CYA disclaimer[/URL]
----------------------------------------------------------------------------------------------
More info on [URL="http://www.pahouselink.com/rent_to_own"]Real Estate Investing[/URL] here.
However, if you’re a Buyer, looking to do a Rent to Own, I’ll guarantee I’ll save you some money & angst, and if you are a Seller/Landlord I may be able to help fend off potential future litigation – either way, its good info that anyone looking to do a Rent to Own should know.
Let’s start out with the premise; on the outside, Rent to Own sounds like it has promise for both Buyers & Sellers, right?
Seriously, I get to “live” in your place, pay you “rent”, then sometime in the future I own it? (ohh wait, isn’t that the same as getting a mortgage and paying that mortgage off – rhetorical question?)
[IMG]http://www.pahouselink.com/images/rent_to_own.jpg[/IMG]
Obviously, the term “Rent to Own” is, and can be, interpreted in an infinite number of ways - and trust me, it is.
This brings us to the core of the problem; Terminology! The terminology is wrong from the get-go. You can’t RENT a place, then sometime in the future, own it – there has to be a sale and transfer of title before the “OWN” part happens (most of the time) and if you are only paying someone fair-market-value for rent then the OWN part never materializes.
Now I know what you’re thinking; hey hey, how about if I pay fair-market-value for rent, then pay [B]“something”[/B] over and above that amount every month thus building up a reserve I could use in the future as, say a down payment??
[B]Great idea – [I]FAULTY thinking!![/I][/B]
And here’s why [I](Sellers/Landlords pay attention here)[/I]; we’ll use an example:...
[INDENT]Sally’s been renting her condo unit for the last two years at $800 a month and has decided it’s time to buy a place of her own. She really likes her condo and figures she’ll approach her landlord and asks if he would be willing to sell it to him.
Sally calls Billy (landlord) and asks him if he’d be interested in selling. Billy, being the shrewd investor he is, realizes, that if he doesn’t sell to Sally and she moves, he will not only need to fix-up, repair, paint and recarpet the place but will also need to find another Sally (tenant).
So Billy suggest to Sally that they do a Rent-to-Own agreement where, for the next two years, Sally continues to rent the condo unit at $1,300 a month and at the end of two years she will have accumulated $12,000 to use as a down payment (check my math, $1,300-$800 (current rent payment) = $500 x 24 months = $12,000) to purchase the unit.
Of course, if Sally doesn’t want to purchase the property after 24 months then Billy (shrewd investor) gets to keep the money for his “time & aggravation”!
Now, in a perfect world, everything works out; Sally builds up a nice down payment, Billy continues to collect rent and gets an additional $500 bucks a month as “security” and doesn’t have to worry about Sally leaving for two years – right?
[b]Here’s the problem; we do not live in a perfect world![/b]
Long about month 23 Sally gets a huge job promotion and needs to relocate to another state – now what?
Obviously Billy is ecstatic (not for Sally’s promotion but) because he gets to pocket an additional $11,500 in profit – he is an Investor genius, ya know.
Sally’s not so happy (she was happy about the promotion but not about losing $11,500 bucks!) She could still purchase the condo and rent it out but she’ll be living out-of-state and trying to manage a property and a new job really doesn’t make sense.
Of course Sally has friends; one of whom knows a little about Real Estate law and suggests to Sally that, she may not have been paying an extra $500 per month in extra rent but, in-fact, may have been buying her condo $500 bucks at a time and she now has an [b][URL="http://en.wikipedia.org/wiki/Equitable_interest"]Euitable Interest[/URL][/B] in the unit.
[/INDENT]
Bottom line, Sally [B][I][U]may[/U][/I][/B] already own $11,500 worth of condo!
Again, I know what you’re thinking, but here’s the reality; the only way this is getting resolved is in court and, if you don’t already know this, the only winners in a court battle are the Attorneys!
So, the question is: Is there a valid way to structure a Rent to Own agreement? And the answer is yes but you’ll need to read my next blog post to learn how.
----------------------------------------------------------------------------------------------
Link to my [URL="http://www.pahouselink.com/disclaimer/"]CYA disclaimer[/URL]
----------------------------------------------------------------------------------------------
More info on [URL="http://www.pahouselink.com/rent_to_own"]Real Estate Investing[/URL] here.
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