Rent to own?

[colsankey]

So my brother bought a new place and possession is comming up faster than anticipated. He was looking to sell it, but now he's decided he might rent it for awhile since his possession dates comming up fast and the houseing market is not at a point where he wants to sell. (He's only been in his old place a little over 1 year and a half, bought at the price-point max)

He's been offered a contract - rent to own - and my understanding is that someone is willing to rent the place on his behalf as management and guarantee $1?00 a month rent; with a clause that in 3 years, should they wish to excercise the option, they could buy his place off him at a set price. This price is fairly close to what he bought the place for in the peak and he wouldn't be making any money, just avoiding a huge loss of selling now and dealing with closing costs, etc.

Obviously he's gotta speculate a little on the houseing market and how much it will rebound in 3 years, but I think 95% of his homes value from the 2007 boom when he bought would be fair.

But thats all basically some background info: My real questions come down to:
Are these contracts fairly straightforward? - It sounds like it is:we'll maange the place, guarantee you X a month, and keep anything extra as profit and in 3 years we'll buy your place for Y.

He has a good lawyer who deals with housing, but I was wondering there's anything he should look out for in a rent to own contract. Are there any clauses he really should have in there, or that would point to a deal breaker?

[barmanjay]

Hmm,.. rent to own company?

Can you get any info on the company? Do they have a website? where do they operate? office? or small 1 man operation?

If you don't feel comfortable with them,.. do more digging

If your brother wants to know what he would most likely get for his house, look at the city property tax assessed value and take approx 80% of that.

This is only an average that has occurred in the last 6 months.

some properties sell for more,.. some less.

Hope that helps.

[bluerush]

I'd make sure that the contract is worded such that any rent or option consideration monies received are non-refundable in the event the option isn't exercised.

Also, watch for any clause allowing the person to sub-let. I wouldn't advise allowing the tenant to choose the people who will be living in the home.

[AZ REALTY]

Lease to purchase contracts are generally worded so that the buyer and seller agree to a purchase price now or agree to pay market value, whichever is greater at the time the option is exercised.

[Mixalot27]

Originally posted by colsankey


He's been offered a contract - rent to own - and my understanding is that someone is willing to rent the place on his behalf as management and guarantee $1?00 a month rent; with a clause that in 3 years, should they wish to excercise the option, they could buy his place off him at a set price.

Originally posted by colsankey

Are these contracts fairly straightforward? - It sounds like it is:we'll maange the place, guarantee you X a month, and keep anything extra as profit and in 3 years we'll buy your place for Y.

These statements seem to contradict each other and I wonder if your brother is understanding the situation correctly. In the frist quote you state that they have the OPTION to buy the place in 3 years for a set price. In the second quote you are stating it like it is an absolute that they will buy the property in 3 years time.

It sounds like your brother is mistaking that it is only an OPTION for them to buy after 3 years. He seems to think that they MUST buy the place after 3 years. But that is only going to happen if the market value at that time is higher than the value that your brother and the buyer have agreed upon. If market value isn't higher than that in 3 yrs, they will not exercise the option.

In that case your brother will still own the house but will have basically paid for 3 yrs of management. The price that he will have paid for the management will be whatever price the place can be rented for minus the $1000 he is getting. So if the place can be rented for $1500/month, he is paying $500/month for management.

If on the other hand, the market value of the house at the end of 3 yrs is above the price your brother and the buyer have set, they will exercise their option to buy the house. In this case your brother will have payed the same as above in monthly management fees (whatever the place can be rented for minus $1000) PLUS whatever additional amount that he could have sold the property in the open market for.

So to me it doesn't sound like the greatest deal but I don't know the numbers either. What your brother is really doing here is paying for someone to manage his rental property. Is that what hes looking for? If he can deal with renting it out himself that would probably be a better option for him financially. He can also hire a management company for a set monthly fee without having to offer them an Option to buy. The only way I really see that brother benefits from this deal is if the place can't be rented for much more than $1000/month. Also I guess it does guarantee that he gets the $1000/month where as renting it on his own, he might have vacant months without rent. Without knowing the exact numbers, it doesn't really sound worth the price he is paying to me though.

[colsankey]

It is an option, perhaps my wording was a little off, but the post was getting a little drawn out so I wanted to just spit it all out.

He's also tentatively looking at being guaranteed $1500, which wouldn't be bad, but likely less than the mortgage (but better he's thinking than losing ~50k+ on the house to sell it ASAP. But since things are still in the offering stages, so its still somewhat negotiable.

He's assuming if the price is close they'd likely buy it, but hes aware it is an option, not a guarantee. At this point, he's still undecided, since he's going to commit himself to having that property for 3+ years if he signs the deal and doesnt know if he wants to tie up that money for that long, if things in his life changed, financially or otherwise.

[canuckcarguy]

If he believes that the market will rebound over the next 3 years, he should keep it, rent it, and not lose the management fee. If he doesn't believe the market will rebound in 3 years, then he should either sell the house today and take his loss, or keep it longer than 3 years. His decision in this essentially will hinge on his comfort with speculating in the market.

There's no real rent guarantee from that company - if the market goes to hell and the rent payment is too high, they will attempt to renegotiate, or simply close their doors, and your brother will still end up with a house.

It's actually a pretty great deal from the perspective of the rental company - they get to speculate on the housing market without purchasing any inventory.