Thinking of "Rent to Own" my home. (balloon payment, sale)

[okpondlady]

I know this isn't really about Oklahoma but it is IN Oklahoma..so maybe it really is relevant.


Since we have moved I have a friend and their family renting my other house. I am already tired of fooling with it, collecting rent, doing maintenance, ect. I would like to sell the house to them (they need a home and can't qualify for a mortgage) and they are already paying a fair amount of rent and are willing to pay the house insurance also.

I know we would need a new lease to include those things, what else do I need to include? I have only ever purchased one house/property and need to find HELP!!!! that we can afford. Thanks Y'all!

[Goodpasture]

You are getting into a whole new world of real estate.....there are classes that last more than a semester on how to do this stuff. but let me see if I can be brief:

1. Rent/Lease Option: this is where at the end of the lease period the the tenant has the option of purchasing or not purchasing. Generally there is a preset figure for the sale price and the rent may include a purchase surcharge or not.

2. Rent/Lease Purchase: this is where at the end of the lease period the the tenant has the obligation of purchasing or not purchasing. Generally there is a preset figure for the sale price and the rent may include a purchase surcharge or not.

It is generally assumed that the tenant will obtain financing at the end of the term if they are going to purchase the property.


What I think you are considering doing is what is called a "Purchase Contract" or a "Contract for Deed." this is where you actually sell the property to the individual and act like the bank.....you hold the mortgage. In Oklahoma there are laws that restrict what you can and cannot do. For example, if you plan on holding the note the any length of time, the contract MUST be filed at the courthouse and if you have to repossess the property (for what ever reason) you have to go the same route a bank does. Even if you hold the note and sell it to someone else, it must be filed.

Most Contracts for Deeds will amortize a purchase over 30 years with a balloon payment sometime sooner. For example you sell a house for $65,000 with a down payment of 10%, you are going to carry the note at 8% for 30 years with a balloon payment in 5 years. This will make the house affordable, it gives the buyers a chance to improve the value through sweat equity (where they fix things up), inflation can increase the value, and they have time to get their credit in shape to where, in five years, they can get financing on their own and pay you off. This kind of contract can be really beneficial to both parties.

On the scenario above, obviously the 10% down is $6,500, leaving a balance to be financed of $58,500. the payment would be $429.25. In 5 years they will owe $55,615.87. But assuming they take care of the house and it equals the typical 4% annual inflation rate we see happening over the past 5 years, the house will be worth $79,000 -$80,000. At that point that will put them in a 30% LTV position where if they have made any attempt to straighten up their credit they should be able to get financed. If they are unable to get refinanced at that point, you have two options. Repossess the house or extend the contract for another period.

Needless to say, all the terms of the contract can be negotiated and it would be prudent to have an attorney write the final document.