Have a great weekend.
CEO & SR Credit & Mortgage Consultant of
Ex-Mortgage Broker of more than 10 years
First, why would someone want to rent to own instead of just buying? Usually it's because they don't have the down payment or can't qualify for a mortgage. If they can't qualify now, why would they qualify a year from now? Is it bad credit? Great, you rent your home to someone who has established they don't pay their bills. Is that what you want?
Second, in order to make it fair to yourself you want to get some additional money up front. Say the house is worth $200k and the rental is $2,000 per month. You might want to get 2% or $4,000 up front. Add this to a months rent and a months security and you get $8,000. An FHA mortgage at 3.5% down is only $7,000. Why don't they buy? Odds are they don't have the $8,000. How do they plan on saving it over the next year?
Third, if you don't get money up front, what do you have? If the house goes down in value they won't want to buy. Their easy out is they can't get a mortgage. You've lost the opportunity to sell at a higher price. If the house goes up in value then they buy the house and you've lost any appreciation in value as the price has already been set. No risk to them.
A rent to own contract or a rent/option is usually a loser for a homeowner. It can work in extenuating circumstances. If you get a nice upfront down payment and charge additional rent each month to be applied to the down payment it can be to your benefit. If they don't buy you have a lot of extra money in your pocket. If they do buy then you really haven't lost anything as selling a year earlier when you signed contracts was the price you would have gotten anyway.
Don't stray from this type of deal structure and you should be fine. If the potential buyers do have bad credit and can't get a mortgage at the start, find out why they have bad credit and ask for proof. Sometimes people have a nasty divorce and credit gets hurt in the process. This is understandable, but ask for proof that this has happened and a full credit report. You need to stay firm on these things or you could end up with a nightmare.
Donald A Mituzas
Licensed Associate Broker
2008 Realtor of the Year
Director - Hudson Gateway Association of Realtors
Douglas Elliman Real Estate