When it comes time to sell your rental property, you might want to try selling it using a rent to own or lease to own agreement. This type of agreement allows your tenants to live in the home as a renter as they work towards purchasing it from you.
In a rent to own situation, you would typically have a standard rental lease along with a separate contract that contains the option for the tenant to buy the rental property during a set time period. The price of the property is listed in the contract (and is usually slightly higher than market value today to account for inflation or appreciation), and if the tenant buys the property, you must sell at that price. However, the tenant can decide not to buy and are not obligated to buy. They simply have the option to purchase.
Here’s simply how rent to own works:
Let’s say you have a 3 bedroom home that you have to fill. You are getting tired of managing the property so you are also considering selling the property. When you get a new tenant, you ask if he might be interested in purchasing the house at the end of his lease. If your tenant would like to do this and agrees to a higher rent as a result (and the other terms) he then signs a standard 1-year lease, along with the contract with the option to purchase.
The tenant pays rent, which also includes a monthly nonrefundable fee. This is why the rent is typically a little higher than normal rent rates – because it includes a rent credit that helps your tenant build up equity that will be used either as a down payment or to reduce the purchase price when it’s time to buy.
This fee, which we call a rent credit, is outlined in the option agreement. If he does not take the option to buy the home at the end of the term the fees you collected are nonrefundable. Or you can also negotiate an extension on the option to give your tenant more time to qualify for the purchase of the home. In this case you may wish to reconsider the future purchase price of the home as the home prices may have gone up making it less appealing for you to sell in a year at the price you’d previously agreed upon for the first 12 months period.
Either way it’s a good situation for you if you’re considering selling. You either sell your property or you’ve made a higher return because you’ve been able to collect the rent credits during the one year term. And you’re helping your tenant buy a home that he may not have otherwise been able to afford or qualify for.
