Do you think he’ll get a few calls on that ad?

Do you think he’ll get a few calls on that ad? 

You’d better believe it! Maybe it would be you! Now we need to go over the figures that would bring this deal to fruition. You may be asking why the down payment is so low. Easy…to attract tenant-buyers! If you saw the same ad for 10- 20% down, or the equivalent of the conventional down payment required by most conventional lending institutions, you would probably move right past the ad! With that being said, the 3% of$275,625 would be $8.268.75. This figure is really not much more that the “usual” amount required moving into a straight rental, considering that most landlords require 2 months deposit, and if you used a real estate agent you would be required to pay at least an additional month’s rent. This is usually a NON-REFUNDABLE deposit should you decide not to purchase the property. Why is it non-refundable? Put yourself in the seller’s position for a moment. He now knows that his tenant-buyer has a vested interest in the property, and is less apt to “trash” the property, knowing full well that they now have immediately acquired equity in the property. How? Simple. Remember we talked earlier about “margin”. The seller is able to apply this down payment, or “option consideration” to the purchase price of the property and in some cases to the down payment required by the bank at the time of the purchase. Here’s how: Based on the margin of $75,625, the option consideration of $8,268.75 is absorbed into the margin, leaving us with the following: $75,625.00 margin or difference between purchase price or amount owed minus the $8,268.75 Option Consideration This leaves $67,356.25 more to “give” to you as incentive to purchase the property and care for the home as you would your own. The option consideration will be deducted from your purchase price as earned “equity” in the property. But wait, It gets better! You ask the seller about the 10% rent credit mentioned in the advertisement for the property. He tells you that you will receive $200.00 per month which will be applied toward, or credited to, the purchase price. In this example, based on a lease agreement of 2 years, or 24 months, you would receive an additional $4,800.00 in rent credit toward the purchase price of $275,625.00. Now we would subtract the $4,800.00 from the remaining margin of $67,356.75, which would leave Mr. Seller a margin of $62,556.75. As you can see, this example is conservative. If you ask the seller the right questions and can find out what he owes, you can figure the margin based on present value plus any appreciation, and negotiate a larger rent credit. In the above case, you could be awarded 30% rent credit or higher! Do your homework before talking numbers. Now you are ready to purchase the home 2 years later at the agreed-upon price of $275,625.00, and are happy to find that your price is now $262,556.25, which is the result of option consideration and rent credit being subtracted from the agreed-upon price. REMEMBER, IN MOST CASES THE OPTION CONSIDERATION IS NON-REFUNDABLE, SOPLEASE BE AWARE OF THIS WHEN ENTERING INTO ANY LEASE OPTION AGREEMENT. Let us return to the point of view of Mr. Seller. He won’t perform nearly as intense a background/credit check as the traditional lending institution would, but expect him to insure that you have no criminal background, have paid your rent reasonably on time in the past, and have a credible employment history. I have seen tenant-buyers who actually have a declared bankruptcy reflected in their credit report and are still able to purchase a property. Speaking of which, you may want to work with a mortgage broker in your area who would be interested in assisting and educating you in the building or rebuilding of your credit to ensure your ability to qualify for a mortgage at the time your option agreement comes due. Should you be interested in learning about protecting and building your credit on your own, please let us know. We have a number of tools and resources available to you. What Does the Seller/Landlord Expect From You? Although each Rent to Own deal has its own points of agreement within the contract, there are several important factors to remember when you purchase a home in this fashion. First off, you will be expected to handle all maintenance on the property. This includes, but is not limited to: Toilet problems, minor plumbing problems, painting, appliance repairs, and window repairs; generally all of the usual “wear and tear” expenses associated with owning your own home. Of course if there is an expense totaling more than $200.00 or so per incident, such as the roof leaking, then you should note this in the agreement. You should obviously try to negotiate the lowest maintenance cost without killing the deal altogether. As with any agreement of this magnitude, I highly recommend you contact the appropriate professionals to guide you through this type of deal, such as an attorney, CPA, or other reputable professional. Make totally sure you work with a professional who is thoroughly knowledgeable in Rent to Own and has worked in this niche in the past. Mr. Seller will also expect you to pay your rent ON TIME. He will expect the rent on the first of the month. Not on the second…the first. They will provide the “incentive” for this assurance by failing to apply that month’s rent credit, should the payment come late. Remember that this is not a rental agreement. There are responsibilities on both sides, but the rewards far exceed the downfalls. 4 “Secrets” of Rent to Own 1) This cannot be stressed enough: I recommend you only enter this or any real estate agreement with the advice of a real estate professional, such as an attorney, and reputable CPA. 2) You should try to negotiate a “right to renew” in such a case that you would not be able to purchase the home at the end of the option period, for ANY reason. 3) When reading real estate ads, look for “tired landlords”. They will write things like: Rent to Own, Make an offer, Low down, Moving, Owner will carry, etc. Look for any signs of an owner trying to entice you into working a deal with them. 4) Above all, use common sense. This is a wonderful opportunity for the right people, but not all deals are for everyone. You will know a deal is for you if you take your time and listen to yourself. Free and useful websites • HomeStarSearch: This is our very own website and one of the most comprehensive databases of Rent to Own, Lease Option and Seller Financed properties nationwide. This is a great place to get started! www.homestarsearch.com • Zillow: Enormously helpful real estate website. Whether you're a buyer, seller, owner, renter, or real estate professional, Zillow is loaded with useful tools and resources. www.zillow.com • Yahoo Real Estate: One of the most comprehensive sources for neighborhood profiles and city information. Also search more than 2.5 million home listings. www.realestate.yahoo.com • Quicken Loans: Headquartered in Detroit, Michigan, Quicken Loans is the largest online mortgage lender and the 5th largest retail mortgage lender overall in the USA. www.quickenloans.com • Realestateabc.com: Real Estate glossary of terms for real estate, mortgage and definitions for home buyers and sellers. www.realestateabc.com