Rent to own - Oregon (balloon payment, sales, real estate market)

[bobsalas]

Hello, We own a home in Oregon appraised at $170k. We would like to move but don't want to sell in this slow market. We are thinking about "lease to own" option.

Here is our plan: the rent for this home in this area is about $1,000 - $1,200 per month. We have a large fenced yard with two nice sheds, painted to match the house. It is about 1,500 square feet. My mortgages total about $1050.

We want to set the purchase price at about $175k-$180k. Have a 3 year term. We want to get $1,500 per month and would credit $350 each month toward the purchase price such that at the end of the the term the renter would have a credit of $12,600.

Questions: Do I need to set up an escrow account for the $350 each month? Can I just, at closing, indicate a $12,600 credit for the renter/buyer? Is this money taxable separate from the rent income?

Thanks,
Bob

[gray horse]

Slow market? Not in my area, according to Zillow our prices went up 5% in the last MONTH. Have you talked to some Realtors to get their ideas on what you could sell for?

[bobsalas]

Originally Posted by gray horse

Slow market? Not in my area, according to Zillow our prices went up 5% in the last MONTH. Have you talked to some Realtors to get their ideas on what you could sell for?

Don't really want to sell at this point as the commission would take so much of my equity, especially after negotiating a sales price. Don't want to keep the house presentable, etc. You know.

[gray horse]

You might want to ask this question in the RE forum, you can get some great advice there. Good luck!

[oregonwoodsmoke]

Where in Oregon is the real estate market slow?

If the house is worth $175,000 right now, what will it be worth in three years? It doesn't matter because you have fixed the price at $175,000.

Best to have a lawyer draw up the contract. You might end up having to foreclose instead of evict if you don't get paid. I suggest that you escrow the $350 a month, just in case you have to give it back.

You will also want to limit what sort of changes your buyer is allowed to do to the property before their purchase is done and paid for.

[NeonGecko]

Originally Posted by bobsalas

Hello, We own a home in Oregon appraised at $170k. We would like to move but don't want to sell in this slow market. We are thinking about "lease to own" option.

Here is our plan: the rent for this home in this area is about $1,000 - $1,200 per month. We have a large fenced yard with two nice sheds, painted to match the house. It is about 1,500 square feet. My mortgages total about $1050.

We want to set the purchase price at about $175k-$180k. Have a 3 year term. We want to get $1,500 per month and would credit $350 each month toward the purchase price such that at the end of the the term the renter would have a credit of $12,600.

Questions: Do I need to set up an escrow account for the $350 each month? Can I just, at closing, indicate a $12,600 credit for the renter/buyer? Is this money taxable separate from the rent income?

Thanks,
Bob

MortgageS??? Plural?

As a buyer moving into Oregon, I would not go for this scenario. Paying rent 50% higher than the norm? Better to find a cheaper place to live and save up. Then all $500 (or more, buyers often live in smaller/cheaper housing than they intend to buy while saving up a downpayment) would go toward a downpayment.

Who is responsible if something breaks during this 3 year balloon-payment scenario? What if the "buyer" can't get a loan at the end of 3 years? What if you die - what rights does the buyer have then? Who is maintaining insurance on the home - is that already included in the $1050 mortgage paymentS? What if the buyer changes their mind - do they get their $12,600 back? What if they miss a payment or are late with their rent?

$12,600 is not enough for a downpayment on your allegedly-$175k home. It's short by more than $20k. Those "5% downpayment" loans are not as easy to get as they used to be, and come with long-term penalties (higher interest rates, special home mortgage insurance at higher rates, stricter income requirements).

This amounts to taking out a 3 year loan with a balloon payment of $162,400 due at the end. It is a very poor risk for the renter.

It's a really good deal for you, though if you keep turning it over this way every 3 years, especially if you've written the contract in such a way that you get to keep the $12,600 if anything goes wrong for the renter. I've been presented with many offers for "land contract" or "rent to own" and every single one of them had clauses in them that made the contract high risk for the renter, but a cash cow for the owner. None of them included a clause to return the "extra" money that was supposed to be applied to purchase of the house. Nearly all of them had one or more clauses that allowed the contract to be broken and eviction to take place immediately if even a single payment was not exactly on time or early. The ones that didn't have THAT clause, had other clauses that levied gigantic penalties for late payments.

You might not intend to be quite so egregious, but I don't think you've really thought this through. Even without any sneaky little tricks somewhere down the line, the deal you propose is a bad deal for the renter. I'm not sure its much better for you. I can think of so many things that could go wrong for either side. What if the RENTER dies? Are you going to refund the money to his/her estate, or surviving spouse and kids? What if you don't intend to do that, and they sue you? What about normal maintenance - plumbing problems, wiring problems, roofing, siding, wind/tree/hail/storm damage?

As described this is a bad deal for the renter, and potentially high-risk for you as well.

I'm also not sure how you managed to end up with mortgageS as high as putative rent. A new mortgage on a property is usually about half of what the prevailing rents are, sometimes even a bit less (not counting taxes and insurance).

[Terryj]

NeonGecko, I don't know what part of Oregon you live in but renting a 1500 sqft home for 550.00 a month, well, I'd hate to see the condition of the home. Most homes in my area that are for rent fall anywhere from 900.00 to 1500.00 a month. In todays real estate market to buy a home @ 170K you are looking at a mortgage of round 900.00 a month that includes PITI. If I were in the market to rent my home out, I'd be asking anywhere from 1000.00 to 1200.00 a month, due to the neighborhood and the condition of the home and landscaping.

I'd say, if you can find a decent 1500 sqft home that rents for 550.00 a month, I'd jump right on it with both feet.

[Lizzaa]

Why not just rent it if you don't want to or can't sell it? I don't see how this would benefit you or the "buyer". If they can't afford the home now to buy, how would they be able to afford it in 3 years? If the home appreciates a lot, you would be stuck selling it to them at $175. I just don't see the logic on either side.

Where are you in Oregon that both the rental and real estate market aren't good enough to rent or sell? I think most areas are doing really well?

[whirnot]

Sell it yourself, and pay no commission. Then pay a realtor a small fee to handle the paper work. We sold ours in one day on Craigs list for full asking price.

[JonathanLB]

Originally Posted by Terryj

NeonGecko, I don't know what part of Oregon you live in but renting a 1500 sqft home for 550.00 a month, well, I'd hate to see the condition of the home. Most homes in my area that are for rent fall anywhere from 900.00 to 1500.00 a month. In todays real estate market to buy a home @ 170K you are looking at a mortgage of round 900.00 a month that includes PITI. If I were in the market to rent my home out, I'd be asking anywhere from 1000.00 to 1200.00 a month, due to the neighborhood and the condition of the home and landscaping.

I'd say, if you can find a decent 1500 sqft home that rents for 550.00 a month, I'd jump right on it with both feet.

I guess some markets are definitely worse than others. I owned a condo in Long Beach for a while that I picked up for $132K and sold two years later for $150K no commissions (sold to a real estate agent) and rented it meanwhile for $1,300/month. I can't imagine owning a place at $175K and only getting $1,000 rent. That sounds terrible lol.