Win/Win/Win for Rent to Own Deal

By: Mark Frentz
www.akerahomes.com
mfrentz@akerahomes.com

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Mark, What's With This Win/Win/Win Stuff?

I grew up with a father who would rather take a hit himself than cheat someone else out of something. I saw this put into practice multiple times and he has lost tens of thousands of dollars a number of times because of this mindset (I'll call it integrity). About a decade ago I approached him with the idea of renting to own and asked what he thought. He basically told me to stay as far away from rent to own deals as possible. The reason was that "The tenant will always lose out on this kind of deal because the landlord will need to protect his/her own interests". I asked for an example and he gave me a few. I left it at that. I trust my dad and his understanding of real estate in general as well as investing. It has only been in the last 2-3 years I have come across some really interesting ways of doing business and helping people who are cash rich and credit poor own a home that actually does help them.

What Does a Typical Rent to Own Deal Look Like?

Dad believed that rent to own deals all fall into a limited category. And he was right. It is a simple transaction that I will explain here, but it does have some variations that I will share as well. Typically, there is someone with a house they no longer want for various reasons and are willing to sell it within a period of time as long as that period of time is hassle free. On the other side of the deal there is a family who, again for various reasons, wants to own a home but cannot currently obtain financing from a financial institution either because they do not have money for a down payment or because the lender/bank doesn't like the family's credit score. The agreement they both sign comes in two parts

1. The lease agreement

This is basically like any other lease or rental agreement. It details how much rent will be paid each month and what will happen to protect both the tenant and the landlord

2. The option contract

The basics of an option contract are: It gives the right to the tenant to purchase the house within a  certain period of time for a certain amount of money. If the contract time limit runs out before anything is purchase, the contract is now null and void. This contract is typically purchased from the landlord for a price and this money is lost if the tenant will not or cannot purchase the house.

In the typical scenario, the tenant is left on their own to save enough money for a down payment as well as rebuild/improve their credit. The landlord receives higher than normal rent and typically hassle free management because the tenants are treating the house as their own and even does minor fixups themselves. Typically, this type of situation works out about 40% of the time (I've heard lower numbers than this as well), based on investors I have spoken with extensively on the subject. The reason these deals aren't completed is that a typically family that has poor credit also has a difficult time saving a large amount of money and doing everything right for an extended period of time so their credit score jumps. This makes sense to me... how can a family rebuild their credit if they may not even know what they must do to improve this score?

What I'm Doing Differently

The way I do rent to own is different in a few significant ways. I call it a 'tenant focused rent to own program'.

First, I only will get into a deal with tenants who have an excellent chance of qualifying for a mortgage with just a little help. 

Secondly, I only work with tenants who have enough money for a down payment TODAY. This is important because it removes a huge obstacle to home ownership

Thirdly, and possibly most importantly, I help these people all along the way so they know what they need to do in order to rebuild their credit. We work with a credit repair specialist who meets with the family a few times each year to monitor the improvements to credit as well as give homework for future improvements.

Lastly, I structure deals so that tenants can choose where they live in the city as well as the exact home they desire. This is done by finding an investor who wants a good return on her/his investment without a high degree of risk. The investor purchases the house for the tenant/future home owner for now. The tenant pays higher than normal rent to make this a good deal for the investor and at the end of a relatively short term (2-3 years) the tenant purchases the house from the investor. 

So... What's the Win/Win/Win about?

Well, when a family that desperately desire to work toward purchasing home is able to not only buy that home, but also control the house until they are able to purchase and can, in the meant time, live in that house they definitely feel like they are moving on in life (especially when they have help all along the way). 

When an investor who is dissatisfied with 2-6% returns on their investments/future retirements (and that's in a good year) receive much higher than that without any management trouble or headaches that can come with renting to others and another person takes care of the details, they know they are profitting while helping another family in need. 

When I put this deal together and work hard to make sure there are few, if any wrinkles in the deal and take care of a family with the desire to own a home as well as an investor who desires to take care of her/his family in retirement and make a profit along the way for my hard work, I absolutely win.

There it is: a win for a family, for an investor, and myself and my family; win/win/win. I love doing real estate because there are legitimate ways to take care of multiple people simultaneously. 

p.s. this type of rent to own scenario is a success over 90% of the time:)

I hope you both enjoyed and learned something from today's blog. Happy investing!


If you would like to learn more about investing in real estate please contact me at the email address listed at the beginning of this article or go to my website at: www.akerahomes.com/investing-in-real-estate.html