By Larry Alton updated February 3, 2017 – Bigger Pockets
You’ve probably heard other landlords talk about rent to own agreements in the past, but have you ever considered entering into one with a current or prospective tenant? This sort of setup can afford you many benefits over the course of the agreement.
How Does it Work?
In most situations, real estate investors either rent out a property or sell it. But if you have a property that’s currently being leased by a tenant who’s interested in one day owning real estate, then you may consider the rent to own option.
“Rent to own, also know as lease to own or lease option, is an alternative to traditional renting or buying,” Rent to Own Labs explains. “You could even think of it as a fusion of both, since rent to own is basically just leasing a home until you become eligible to buy it.”
5 Benefits for the Seller
At first, rent to own agreements may sound complex and overrated, but they’re actually fairly easy to setup. Unbeknownst to many, these agreements also benefit the seller just as much (if not more) than the buyer. Check out a few of the specific advantages.
1. Higher Sales Price
If you’re trying to sell your property in a soft market and are having trouble, renting may be your next best option. But you may also find that a rent to own agreement is enticing to individuals who can’t afford to buy a home at the moment. With a rent to own agreement, you can offer a very convenient method of financing to tenants/buyers. As a result, they’ll pay a premium.
2. Better Tenants
You’re going to get better tenants when you have a rent to own agreement in place. They know the property will one day belong to them and will therefore have its best interests in mind. They’ll take better care of things, maintain the yard, and respect the neighbors. This creates fewer headaches on your part and is worth its weight in gold.
3. Guaranteed Occupancy
If you set up a rent to own agreement that lasts for five years, you essentially have guaranteed occupancy for that period of time (unless they back out). This reduces the burden of vacancy and turnover rates and helps maximize cash flow.
4. Minimal Risk
There’s virtually no risk for the seller in a rent to own situation. For example, if a tenant/buyer backs out of the agreement after a couple of years, you still get to keep the property and all of the escrow money that they had put forth for the sale of the home.
As Fox Business notes, “Sellers can even have the buyer agree to handle all home repairs and maintenance, placing the burden on the renter if anything goes wrong with the house, and alleviates the need for the seller to act as landlord.”
5. No Commission
The commission on the sale of a home can total thousands of dollars. For example, if you’re selling a property for $200,000, it’s likely that you’d owe your agent $6,000 at the closing table. With a rent to own agreement, you don’t need an agent and can keep more of your money.
The Best of Both Worlds
As a landlord, don’t immediately shrug off the idea of a rent to own agreement. While you may not be pursuing the sale of one of your properties right now, consider this type of agreement as a mutually beneficial option when you’re OK with the idea of unloading a property in the future.
Larry Alton is a professional blogger, writer and researcher who contributes to online media outlets and news sources. A graduate of Des Moines University, he still lives in Iowa as a full-time freelance writer and avid news hound. In addition to journalism, technical writing and in-depth research, he’s also active in his community and spends weekends volunteering with a local non-profit literacy organization and rock climbing.