# How to calculate rent-own contract?

How to calculate rent-own contract

I am looking to buy my dream house via rent-to-own method
How can I calculate the rent price and the security credit price ?
Here is the parameter:
1. Rent for 3 years
2. Closing buying price for the house after 3 years - \$xxx
3. Monthly rent for the house :
Monthly Rent: \$yyy from this \$zzz will go to Security for the down payment.

How should I calculate the value above?
For example:
A house with a today sell price \$550k
â€¢ Rent for 3 years
â€¢ Closing buying price for the house after 3 years - \$450k
â€¢ Monthly rent for the house :
Monthly Rent: \$2800 from this \$500 will go to Security for the down payment.
After 3 year of rent I will be able to buy the house with a price of \$450k,
My security credit will be 3*12*500 = 18,000
I will need to pay 450k-18k = 432k

## Help the community by answering this question:

6

I have to ask the same question as Ms. Irene Renna. Where did your \$450,000 number come from in your example?

Before the real estate market fell apart, traditionally you could figure out what the local appreciation rate was per year (usually 3%-6% conservatively), then take your original \$550,000 x 3%(1st year) = \$566,500 then take \$566,500 x 3%(2nd year) = \$583,495 and so on and so on.

But in these days and times there would be very little, if any, appreciation. (Don't forget.....real estate is LOCAL!) The way we structure OUR deals is that we go off today's current market value. (Granted...our lease terms are typically 12-16 months) The seller gets slightly above current market value (depending on their motivation because they are offering great TERMS as opposed to a total CASH sale deal) and then could get any monthly cash-flow on the lease payments.

There are sooooooooooooooooo many ways to put the numbers together in a lease-to-own deal that I could (and maybe I should) write a book about it.

Here are some really basic ways to put the numbers together from the late, great Bob Bruss on a house HE bought for himself and some of his deals:

http://www.lease-purchase-solutions.com/Lease-Option-Pros-an…

http://www.reallygreatrate.com/mortgagenews/When_home_wont_s…

If I WAS THE BUYER in your deal, here's how I WOULD WANT MY NUMBERS or at least MY situation to pan out (it's all based on the seller's motivation):

~ Negotiate the lowest possible option price based on the seller's motivation. Let HIM/HER give you a number. He who speaks last wins. In a decent market with any appreciation, I would go up a little on the option price. In a flat market or slightly weak market, I would go with the current market value as that is what the seller would be getting anyway if he/she sold the house traditionally.

~ I would put as little option consideration down as possible. Once again, it's based on the seller's motivation. Greedy sellers try to ask for 10% down. You may get away with an amount equal to one month's lease payment. Tell them it's like a security deposit.....only they get to keep it either way since it's non-refundable.

~ Monthly lease payments will typically be higher than market rents. Lenders will want to see that you're not going to have sticker shock when you go to get financed after 3 years....ie...... you go from \$3000 lease payments to \$7000 mortgage payments. We typically try to set our lease payments for the tenant/buyers in OUR program as close to what the PITI is going to be after traditional financing. This makes the future mortgage lender feel "warm & fuzzy" knowing that the tenant/buyer has a track record of paying an amount (in rent) equal to what they are getting financed for.

~Rent Credits......ok....here goes. Lenders will typically only allow the seller to contribute 3% of the rent credits as a seller concession at closing. The rest would have to come off the originally agreed upon option price. So....if your getting a bunch of rent credits built up over 3 years, you will have to make sure your lender will allow them to be used towards the option price. Sometimes they will only allow an amount over and above typical market rent to be applied. (check with your mortgage lender as to his/her guidelines)

NO MATTER HOW YOU DO IT, make sure you have a knowledgable Attorney, who has dealt with lease options, put together your paperwork or consult with you so that you and the seller have IN WRITING, who is responsible for what, and all the numbers are already agreed upon! It will save you a boatload of problems!

Best wishes & Laus Deo,

Darin Ray
Lease-to-Own Professional
Independent Consultant
I am the owner of a home that is under a rent-to-own situation, in my case the tenants (who are my family members, by the way) have signed a lease that gives them the option to purchase. With every rent payment they get some credit toward the equity in the home.

As a buyer, you are not the one who gets to decide the terms unilaterally, if at all. What really happens is that the seller will tell you what she or he is willing to accept.

These arrangements are complex and usually not in the best financial interests of the seller, so usually there is something else going on--such as family concerns, or a desperate seller, or legal tie-ups that prevent the immediate sale and close, for example.

Both parties need attorneys who will hammer out the details that you're talking about here. At this price point you certainly have the money to hire experienced legal help, this is no time to skimp on legal advice. Send me an email if you would like my list of NY area attorneys.

Karla Harby, VP
Rutenberg Realty
kharby@crrnyc.com
1 vote Thank Flag Link Sat Dec 4, 2010
Why would a house worth 550 today be worth 450 3 years from now? Not that I'm thoroughly familiar with CT real estate, I doubt that real estate in CT is still depreciating, and certainly not at that rate.

Look at it from the seller's point of view. If they can sell now for 550, why should they hold it for 3 years to sell for 450?

As for the structure of your lease-option, you and the seller can certainly do whatever is agreeable to both parties. Generally, a cash down payment of between 5 and 10% is made by the tenant (you). This deposit is non-refundable and comes off the agreed upon purchase price. The monthly rent generally does not include a credit toward purchase.

Darin told you what you need to know. Keep in mind that lease-option deals are negotiated--not found. Unless you plan to make an offer on your dream home using a lease-option, it's highly unlikely that you'll get an investor to front nearly \$1M to buy that property and lease-option it to you.
If you are not working with an agent and or an attorney who specializes in real estate, it's in your best interest to do so--rent to own contracts and calculations can prove to be tricky--do you already have an agreement with the owner of a specific property.......
Hello :)

My question to you is, have you found a home you are interested in? How are you setting the value of a home 100,000 cheaper in three years?

I would like to discuss your situation with you and see if I can be of assistance.

Call Me

Irene M. Renna
Century 21 Princeton Properties
(631) 467-0009 office
(631) 467-0029 fax
(631) 291-2180 cell
Irene.Renna@Century21.com