How the Rent To Own Option Works

by : Charles W. Moore

In real estate, one of the best ways to make money as a creative real estate investor is to work with rent to own options. Doing so can be a source of income from several directions. First, you receive money up front from your buyer, followed by monthly cash income. Finally, the purchase price should easily bring you a profit on the property. Best of all, with this sort of real estate option, your buyer will pay you more than the property value for the home. It sounds too good to be true, but evaluate exactly how a rent to own option works.

Rent to own housing is a lot like leasing a car. When you leave the dealership, you have made a security payment on the vehicle (like a down payment on a purchased car), and you have agreed to make low monthly payments for a contracted time period. At the end of that period, you have an option to return the car to the dealership in good condition or finance out the price of the car and purchase it. In real estate, the individual looking to purchase the home is called a tenant-buyer because he or she is first a tenant, renting the property for an agreed-upon period of time, and later becomes the potential buyer.

Tenant buyers are typically individuals with insufficient credit or circumstances to qualify for a mortgage loan and still considering purchasing a home. Through a rent to own option, they can build their credit and make sure they are prepared for the responsibility of owning a home prior to jumping into the deal, and you can benefit from this decision. You will have two separate contracts with a tenant buyer, and you will receive money from them in three different ways.

The initial contract will be a lease or Standard Rental Agreement, with the agreement to make certain payments for a particular period of time. For example, a two year lease of $800 per month payments would result in income for you of $9,600. At the same time, an Option to Purchase contract would be completed that would involve two parts. The first would be an agreement to pay a Non-Refundable Option Payment of 3-5% of the value of the home. This is like a security deposit that takes the house off the market and sets up the home for the second part of the contract.

The second aspect of this contract is the Exclusive Right to Purchase. This means that, if the tenant pays the up front Option Money, maintains the rental agreement, and wishes to purchase the home at the end of the rent to own contract, he or she has the exclusive right to purchase the home without you putting it on the market. However, the individual is not obligated to do so; much like someone who leases a car can simply return it at the end of a contract. Usually, however, the person will decide that they don't want to move and will obtain the mortgage loan that will allow them to purchase the home from you at the originally agreed upon price, which is your third source of income from the home.

In review, the rent to own process can help tenant buyers get into a house they otherwise would not qualify for and also help creative real estate investors to make money in three ways. The tenant buyer places a deposit up front that is cash in your hand and then continues to pay an agreed upon amount for the terms of the rent-to-own contract, creating monthly income for you. At the end of the contract, the tenant-buyer obtains the money to purchase the home from you, at which time you are able to sell the house for a profit.