There is a number of ways to sell a house. For example, you could hire a Realtor to list the home in a multiple listing service and sell the house for you. If you want to avoid paying for a real estate agent, you could sell it as a “For Sale By Owner,” or you could sell with owner financing, also called seller financing. But when people ask me, “Jay, how have you been able to close 27 deals in the last 12 months?” I tell them about my “Selling on Rent-To-Own Strategy.”
Rent to own, sometimes called “lease purchasing,” is when the seller and the buyer enter into an option agreement. There are actually 2 agreements here in North Carolina. The Option Agreement and The Residential Rental Contract, both of which are mutually exclusive. The buyer, also called the “tenant-buyer,” pays rent to you over a set period of time. I usually set this term at 12–24 months. During this time, the buyer gets prepared to be approved for a mortgage. During the 12 – 24 month term, if the buyer has prepared themselves to be approved for a mortgage by either improving their credit scores and/or verifying income that will allow them to be approved for a mortgage, you then transfer the title and deed the property to them, and you get to cash out. During this 12 – 24 month term, they live in the home and enjoy it as if we had already transferred title when they took possession.
Selling a home using the rent to own exit strategy sounds more complicated than it really is, which is why many real estate investors avoid this option. But in this article, I’m going to tell you nine reasons why selling on a rent-to-own basis is the most profitable way to sell a home.
1. The Buyer’s Primary Motivate is NOT The Price of the Home
When people buy a home via rent to own, their primary reason for doing business with you is to move toward actually owning a home. Most tenant-buyers either don’t have a high enough credit score to qualify for a mortgage or they are self-employed and can’t currently verify enough taxable income. When you sell on a rent-to-own basis, you are working with highly motivated buyers who want to do business with you. Their primary buying decisions are based on: (A) Do they like the home and its location (B) The Downpayment you require (C) The Monthly Payment
2. You Get Big Cash Flow Immediately by collection an Option Fee
When you sell via rent to own, the buyer payers an option fee, which is the legal term for a nonrefundable lease option deposit. This option fee is usually not less than 5% of the purchase price. I just recently received an option fee of $64,000 on a $280,000 sale. The buyer offered and was willing to pay this large option fee because 100% of the option fee goes toward the purchase price when the buyer is ready for a mortgage and close.
Keep in mind that if the buyer doesn’t get ready to be approved for a mortgage in the period of time you agreed on, you, as the seller, can extend their term and charge them another option fee. Here’s how I do it: If the tenant-buyer has been holding up their end of the deal on getting ready for a mortgage, then I extend the term and don’t charge any more option fee. That said, if the buyer decides not to extend the term and instead moves out, the option fee is nonrefundable and forfeited. You as the seller get to keep 100% of the option fee as a Forfeited Option Fee. You can then sell the home again to a new Rent to own buyer and receive another Non – Refundable Option fee.
3. You Enjoy Positive Monthly Cash Flow
Your Positive Monthly Cash Flow is the difference between the rent you are bringing in each month and your underlying or current mortgage payment, if there is an underlying mortgage payment. You could sell a Free and Clear Home on Rent to Own whereas your positive monthly cashflow would be your entire rental income. For me, my debt would either be with an existing mortgage company if I purchased the home using the “Subject To Buying Method” or with private lenders who loaned me the money to purchase the home. By utilizing rent to own, I get to pocket the spread each month between what the tenant-buyer is paying for rent and what I’m paying the mortgage company or a private lender.
4. You’re Not a Traditional Landlord
Rent-to-own agreements aren’t the conventional tenant-landlord relationship. When I sell via rent to own, my buyers have 30 days from the time they take possession, to get the home inspected, and report any major components of the home that are not working as intended. This includes windows leaking, doors that don’t close right, hot water systems not working, or problems with the HVAC. I’ll take care of any problems reported within the first 30 days. After that, they are 100% responsible for any repairs.
5. You Can Write Off the Depreciation on Your Taxes
When you own the property, even when the buyer is renting from you and living in the property, you can write off the depreciation of the property on your taxes. This is because the buyer is a tenant-buyer. Until they are ready for a mortgage, close on the house, and get the title and deed transferred to them, you get to take advantage of the depreciation.
6. The Selling Price Is Set 5–10% Higher than for what the home will appraise
When I sell a home on a rent-to-own basis, I set the price 5–10% above what the home would appraise for today. This is because I want to take advantage of any appreciation in the value of the home while the tenant – buyers are living in the home. I give my rental homebuyers 12–24 months to get ready for the mortgage and move to cash out. Well, my lands, if we’re in an appreciating market, I don’t want to shoot myself in the foot and give up the additional profit on what the home may be valued and appraise for in the future when the tenant buyers are ready for their mortgage.
7. You Get to Write Off the Interest on Your Taxes
There’s yet another tax benefit for selling on rent to own. Let’s say you’re making interest payments to a private lender who funded the deal for you, or you bought the home subject to the existing note and are making interest payments to the mortgage holder. You get to write off that interest on your taxes.
8. There Are Usually No Home Inspections by a Traditional Home Inspection Company
When you’re selling a home through the multiple listing service — which happens to be the most expensive way to sell a home — inevitably, the buyer will get an inspection at the advice of their real estate agent. This is good advice. If you’re buying a home you’ve never lived in, you should get it inspected! It will cost around $450, and the inspector will find every minute thing that might be wrong with the property.
In the world of selling with a rent-to-own strategy, there is typically no inspection when it comes time for buyers to cash out. This is because the buyers have already been living in the house for six months or even two years! They already know if there’s anything of major consequence they need to be aware of. And, they have been responsible for all repairs after one month of living in the home.
9. It’s the Most Profitable Exit Strategy You Can Employ in the Long Term
All of these factors — The Buyer not Negotiating with you on the Price, the cash flow, the tax benefits, and not having to pay for repairs or be beat up by a Home Inspection Company — are why selling on a rent-to-own basis is incredibly profitable. Now, keep in mind that this is a longer term exit strategy than listing the home in the multiple listing service with a Realtor. As I stated earlier, it takes me between 12–24 months to cash out because I require the buyer to enter into a credit repair program when they buy. With my program, I’m able to cash out 80% of the buyers I sell to on rent to own. I’ve found that if you leave buyers to their own devices, only 5% of them will cash out.
There you have it! The nine reasons and benefits to sell homes on rent to own. There are many benefits to real estate investors, but there are also many benefits to the buyers. As stated earlier, buyers who enter a rent-to-own program often are unable to purchase a home the traditional way. In fact, close to 80% of the public are not able to get approved for a mortgage. Therefore, there is a huge number of prospects in any market that would love to have the opportunity to own a home when you offer a Rent -To- Own Program. You are helping them realize the American Dream of homeownership!
Everybody wins, and that’s the best way to do business.