Rent-To-Sell aka Lease with Option to Buy FAQ’s
(Property Owner)
Is My Property a Good Candidate for Rent-To-Own?
Q: What is a Lease Option?
Answer:A lease option is essentially a purchase contract combined with a rental agreement. The buyer leases the property for a specified period of time and then has the option of purchasing the property before the end of the lease agreement. Sales price, length of rental, closing costs, and maintenance are al negotiated much the same as a conventional real estate transaction. A lease option, if properly utilized, is both a seller and a buyer’s dream come true because it can eliminate many of the negatives normally attributed to the selling and buying of a home.
Q: How does the rent-to-own process work?
Answer: We present a monthly lease amount as well as a pre-determined sales price that is agreed to by all parties. A lease option /purchase is basically a monthly lease set up over a pre-determined period of time. At the end of that time, we purchase the home from you whatever the pre-determined price is.
The basics are simple:
- Your rent your property to Casa Preservation, LLC
- You give Casa Preservation, LLC the right to buy your property
- Casa Preservation, LLC places a buyer tenant in your property
- The tenant/buyer receives the right to buy your property at a predetermined price
If you decide you want us to market for a tenant-buyer for your property, please scroll down past the below faqs and complete our online quick form, or you can download our PROPERTY INFORMATION SHEET (click to download) manually. This provides us the information we’ll need and gives us an idea of the current condition of the property along with any special features to include in the marketing.
You can email the document to dave@capstonecapitalusa.com
Once we receive the Property Information Sheet, we will contact you to go over marketing your property. Once all of your questions are answered and everything is a go, we’ll send you our NON-EXCLUSIVE Tenant Placement Agreement via SignNow for quick & easy electronic signature. Again, the document is non-exclusive (you can keep marketing your home however you like). It simply gives us the legal authorization to market your property.
From the Tenant-Buyer side, the process works as follows:
- They submit a Rent-To-Own application.
- They view the property (we will schedule this accordingly).
- They submit all docs required to completely process their application. We do all the screening (income verification, rental history, credit reports, criminal background, etc).
- We review all information on qualified applicants with you.
- You approve your desired applicant.
- They submit funds to escrow if they haven’t already (Option Down Payment/Option Fee plus first FULL month’s rent due prior to receiving keys).
- Contracts and ancillary documents (lead disclosures, etc.) are sent to all parties via HelloSign for quick & easy, no hassle signing.
- You meet with approved applicant for property walk-thru, provide keys and they move in!
- Going forward, they pay monthly rent directly to you.
-
Tenant-Buyer exercises their option prior to the Option deadline.
Q: How do we decide on an option price?
Answer: We do a comparable sales analysis to determine the property’s current max value. We’ll be sure to discuss with you any special features of your home in comparison to the surrounding homes nearby. We will provide you our assessment of the highest value we think the property could appraise for in today’s market. As you are aware, your tenant-buyer will be getting a home loan to purchase your property and the lender will require that the property appraise for at least the option price.
Q: Why don’t I just sell my house myself or rent it in the meantime?
Answer: These are always options available to you. The difference would be that you are responsible for your monthly payments, maintenance and repairs during the selling period. You need to try to find someone who can actually qualify for financing, wait for them to get approved, and hope that they don’t pull out of the deal, making you start the whole process over again. Renting during this period opens entirely new difficulties that would-be landlords often overlook, especially when you are trying to show the home and sell while renters are living there.
Q: Why don’t I just find my own tenant/buyer?
Answer: If you have the expertise to screen potential tenant/buyers, check references, know what sort of credit scores will allow someone to be able to be financed, deal with maintaining your home while someone else lives in it, work with mortgage brokers to get them financed, and finally, process all the paperwork and set up a closing, then finding a tenant/buyer on your own would be a viable option for you, If you lack the expertise in any of these areas, we are able to help.
Q: How long does it take before your tenant/buyer cashes me out?
Answer: That can depend on a number of different factors. We work with many mortgage brokers that are usually able to get most people financed after they have paid for 12 months on the lease option. Since everyone’s credit history and circumstances vary, that time period can be shorter or longer for the tenant/buyer that we eventually put into the home. Because of this, we cannot guarantee the exact time our tenant/buyer will secure financing. However, until our tenant/buyer qualifies for financing, we continue to pay all the expenses related to the home. It is also in our best interest to get our tenant/buyer a new loan as soon as possible, since that cashes us out as well. We aggressively work to get our tenant/buyer financed as soon as possible.
Q: What happens if the property does not appraise for the option price?
Answer: If it does not appraise, you have the following options:
- Lower the tenant-buyers’ option price to a lendable value; or
- Extend the tenant-buyers’ terms until the home does appraise for the option price; or
- Any other amicable solution you and the tenant-buyer can come to.
Q: How do we decide on a monthly lease payment?
Answer: We usually recommend either the market rent or what we refer to as “mortgage rent”, whichever is higher. “Mortgage rent” is the monthly amount estimated for a typical mortgage payment for the property at the option price including taxes and insurance. In most circumstance, market rent is higher.
Q: How do I get my payment each month?
Answer: We can set it up however you like. Some of our homeowners like for us to electronically send the payment each month straight to their bank account. Others prefer us to set up an escrow account where we mail the rent to the escrow account and the account pays the mortgage. (You can call the escrow account anytime and request a statement of activity so you can see when the rent was paid and when the mortgage was paid,) We normally set it up to automatically pay your lender each month and send you the difference. That way you won’t have to worry about a thing.
Q: Why should I offer a “rent credit”?
Answer: Offering a “rent credit” gives the tenant-buyer a powerful incentive to pay their rent on the 1st of every month (not the 2nd, 3rd or thereafter). It also is a strong monthly reminder that they are regularly continuing to invest in what will be their future asset.
Any “rent credit” does NOT affect your monthly cash-flow. The credit is NOT taken out of the monthly rent, nor is it something you should set aside each month. The tenant-buyer is still paying the full month’s rent each month. The “rent credit” is only calculated at CLOSING only when they go to exercise their option.
The accumulated credit can then be applied at closing either as a reduction in option price or as a contribution/subsidy for closing costs (in today’s lending environment, it is highly unlikely that the lender will allow this “rent credit” to count as part of their down payment).
Most sellers typically offer a “rent credit” somewhere around 5-15% of the monthly rate with a minimum of $100.00. So in the example of offering $100.00 per month, assuming the tenant-buyer paid all their rent on the 1st of each month and they exercised their option at month 10, you the owner would either reduce the option price by $1,000.00 OR contribute $1,000.00 towards their closing costs ($100.00 x 10 months = $1,000.00).
Q: If the Option Down Payment/Option Fee the tenant/buyer pays goes towards your compensation, how is the owner protected in event the tenant-buyer causes property damage?
Answer: The contracts make the tenant-buyer fully and financially responsible for all repairs and maintenance beyond normal wear & tear AND responsible for all repairs and maintenance up to a certain dollar amount (usually $100.00) for each repair item. Keep in mind the option fee/option down payment is NOT refundable (unless you breach the contract). We have never had a tenant-buyer who put down at least 3.5% of the option price from their own funds do anything (like damage a property) to jeopardize that investment. A tenant-buyer is truly a different caliber of person than a typical renter.
Sometimes, typically due to unforeseen circumstances, there are tenant-buyers who do not exercise their option and hence vacate the property. Most times they leave the house in excellent condition, and many have even completed improvements to the home leaving the owner with an improved property! We do a thorough back ground, employment and rental history check for best efforts to place the best of the best tenant-buyers.
Finally, it is tough for tenant-buyers to come up with the option fee/option down payment, PLUS full first month’s rent, PLUS a security deposit prior to move in. A better solution to handle maintenance and care of the property, one we strongly recommend, is for the owner to provide for a home warranty for the first year. The tenant-buyer pays the deductible when the home warranty company sends out a contractor to do the repair. If they can’t fix it then they replace it for no additional cost outside the deductible! A home warranty is the most economical way for the tenant-buyer to be responsible for repairs and maintenance. An added bonus is that you don’t have to be the “middle man” as the tenant-buyer contacts the home warranty directly and pays the vendor the deductible directly. The typical deductible can be either $75.00 or $100.00.
Q: What if a tenant tears up my house?
Answer: There’s no way that I can guarantee you that a tenant won’t damage your house since you or I won’t be living with them. But under the agreement that I will have with you, as the seller, if that happens, I will repair it at my expense. My objective is not to find a “tenant” – my objective is to find a Buyer who will eventually own your house. I investigate them thoroughly before entering into an agreement with them. Damages are rarely a problem. In fact, in most instances we have found that our buyers many times have improved a house with new carpet or some other upgrades, such as fencing. Again, if it does happen, we’ll fix it, and I put that in writing.
Q: How is the Option Down Payment transferred to the buyer at closing?
Answer: The tenant-buyer is required to put their option fee/option down payment in a third party escrow account. Once all parties sign contracts the funds are RELEASED from escrow. Please note that funds do not “sit” in escrow long-term. When the tenant-buyer is ready to exercise their option later down the road, they will already have all the documentation needed to provide evidence of their option down payment to their lender or mortgage broker. Sometimes loan underwriting may require a statement of account from the escrow company which is very easily obtained by the escrow company. Lenders just need to see that the option down payment/option fee is “seasoned” (usually for at least 60 days) and “sourced” (came from the buyer). Once the funds are confirmed, the amount the tenant-buyer put down for their option is simply reflected on the HUD closing statement as a line item usually as an earnest money deposit (EMD). In other words, the actual funds do not have to be produced at the time of closing as it’s all accounted for accordingly on the closing statement.
Q: Is the option fee/down payment just applied to the contract price?
Answer: The option fee/option down payment is strictly and solely to be considered as a down payment on the property and is applied to the contract price at closing. However, if the tenant-buyer put more than the minimum down payment required by their lender (usually 3.5%), and say put 5% down…the tenant-buyer could satisfy the 3.5% minimum and use the remaining 1.5% to pay for their closing costs.
Q: What percentage of your tenant-buyers actually end up exercising their option?
Answer: On average approximately 80% of our tenant-buyers go on to exercise their option. About 20% of those needed an extension beyond the initial term. This is why we now start off the initial terms to be at 18 months rather than 12 months.
You may find that stats for other companies are far lower, so much lower that many times people find our stats hard to believe. We’ve talked to quite a few similar companies and individuals out there over the years and find that, for the most part, owners sign contracts with the first person who has some decent cash to put down without giving careful consideration to the tenant-buyer’s ultimate goals, finances, credit, etc. Either that or they attempt to convert a traditional renter into a tenant-buyer. Essentially, in both cases, the screening and pre-qualifying is minimal at best. We make it an explicit point NOT to do business this way for a number of reasons…most importantly, this is not in either the tenant-buyer’s nor the owner’s best interest! We don’t consider it good business to depend on luck or happenstance for the sake of a speedy placement when there are so many smart and effective ways to increase the odds of ultimately accomplishing everyone’s goals.
Q: What if your tenant/buyer doesn’t buy the house?
Answer: Our tenant/buyers are carefully pre-screened to ensure that they want to buy the house and are able to do so at some point in the future. However, circumstances can change in someone’s life, such as an unexpected job transfer that can make it necessary to move. In situations like that, we continue to pay all the expenses for the house while we find another qualified tenant/buyer to put into the home. Remember, we make our money when your house sells.
Q: What are the Advantages For the Seller?
Answer:
- They are having a hard time selling their house
- They don’t have enough equity / upside down
- They get to rent their house to someone who wants to BUY it
- They don’t have to deal with the typical landlord headaches
- They walk away with more money
Q: What are the Advantages for the Tenant-Buyer?
Answer:
- They can “try out” a house before they buy it
- Maybe get monthly rent credits
- Get to lock in a price
- Gives them time to rebuild their credit
- They don’t have to rent & then move when they are ready to buy a house
Q: Are their benefits to the Rent-To-Own model?
Answer: Probably the biggest benefit to the owner is their NETTING considerably more in exchange for the flexibility they offer with rent-to-own. We find that our owners NET at closing an average of 20% or MORE than they would have selling the property through traditional methods. With our tenant-buyers, there are no low-ball offers (up to 4+% average), there is no demand for “seller help” (up to 6%), they pay all closing costs (~2%), no out-of-pocket inspection repairs (1% average), and there are no commissions (up to 7%) to be paid when they buy (unless you choose to have an agent involved which is fine with us).
And finally, the owner has a family living and caring for their property to a much higher standard than that of a typical renter. A much better option especially if the owner was willing to rent the property out as a last resort anyway.
What are the Advantages for the Tenant-Buyer?
- They can “try out” a house before they buy it
- Maybe get monthly rent credits
- Get to lock in a price
- Gives them time to rebuild their credit
- They don’t have to rent & then move when they are ready to buy a house
Q: How Do the Net Numbers Work – Traditional Sales vs Rent-To-Own?
___________________________________________________
Rent-To-Sell Online Inquiry
Interested in rent-to-sell for your property? Fill out the form below and someone from our team will be in touch shortly.