Do I dare "rent to own" my rehabbed house? - Posted by Ron

Real Estate Investing
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Posted by Judy Miller - American Note on March 10, 2000 at 12:22:00:

Michael hit the nail right on the head. If you make your home available for purchase through owner-financing, you are going to require some money down, whether it is 5% or 10%, enough that your people are giving you more than just a month or two rent deposit!

This means they now have something that matters to them invested. Your potential buyers are likely to not have the best credit. So you create the financing, perhaps if the credit is bad enough, a first and a 2nd, selling the 1st out of escrow, and holding the 2nd for return on your investment.

There are dozens of ways to look at this, but I’d rather have someone slightly invested, which I call “a little bit pregnant” into a property and hold a note on it, rather than be a landlord to someone who just has a deposit up.

Let me know if we can be of further assistance.

Judy Miller - President

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Do I dare “rent to own” my rehabbed house? - Posted by Ron

Posted by Ron on March 09, 2000 at 21:07:43:

I rehabbed a house in a marginal neighborhood. (I misjudged the location when I bought it – a mistake I hope not to make again.)

Anyway, I still did a real nice job on a full rehab (spent roughly $20,000). Had almost no interest from buyers. Finally found one, had them pre-qualified, but they were denied the loan two days before settlement.

Now I’m looking at multiple listing it and hoping that paying a $4,000 will get me a qualified buyer. However, it’s possible that won’t do the trick because I seem to be the only one who didn’t know that this was an undesirable location.

I’m thinking about letting my “denied” buyers rent to own this house. I figure if they pay me their rent on time for six months, and they have six months more tenure on their jobs (the wife has been working only for 3-4 months), they should be qualified for a loan.

My concern is that rehabbed houses never look the same after they’ve been lived in – it will require repairs, etc. if they don’t buy it in six months. Also, I’m not a landlord and don’t like the headaches (including possible eviction down the road).

Am I overly concerned about this? If I do it, what should I do to protect myself (and my house). Would appreciate advise from others who have been here before.

Thanks.

Ron

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Re: Do I dare “rent to own” my rehabbed house? - Posted by Wilton

Posted by Wilton on March 13, 2000 at 22:06:56:

Each time that I have rehabbed a house, done a good job so that it would sell, Changed my mind because it took longer that expected, rented it out …I have had to go back and do it almost all over again. I now try to decide up front; is this going to be sold or is this a rental, then stick with my guns and SELL IT.
Spend more money and time on getting the job done…You will be glad you held your ground. Just my opinion…Wilton

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If you want out… - Posted by Paul_NY

Posted by Paul_NY on March 11, 2000 at 02:24:29:

…take a sizable down payment, owner finance the house, and then sell the mortgage. It works for me.

The down payment ensures the buyers are at risk, as Judy and Mike have already mentioned.

Now the buyers ARE homeowners and will treat the property as such. As Joe said, you dont want to remodel twice.

Paul_NY

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my view - Posted by Laure

Posted by Laure on March 11, 2000 at 24:33:00:

I rehab too, and to dump 20k into a house takes a lot of time and guts. I just L/0 a house that I rehabbed for 20k. It is scary that’s for sure. I thought the same things… if they don’t buy, I have to paint the whole house again, the carpet won’t be “new” anymore, etc. I don’t want to wait a year to get my profit, so I am writing leases for 6 months now.

Look, your buyers ALMOST got financed the first time. I would bet that you are right, and that in a few more months, they will fly through financing. I would NOT pay a realtor to “try” to sell your house. If the neighborhood isn’t that great, then the house will just sit empty anyway adding up interest expenses and utility costs.

Contact the lender and find out what steps the buyers must take to be loanable in the near future. Ask if they allow owner carry-back financing. You might be able to carry back a second mortgage for 5% and get the loan through. And afterall, 5% carryback is still
less than you would pay a realtor. My best friend was turned down by three lenders this week. Today I walked her over to my lender, and she was approved in 45 minutes for a 8.5%, 30 year mortgage with 3% down !!! She wasn’t buying a house from me, but I still took her over there… that’s just the kind of friend I am…LOL.

As for the repairs, if you decide to L/O the property, spend the money on Bronchick’s L/O course. His forms state that the buyer is responsible for ALL REPAIRS. I usually write in that I will repair for the first 30 days, in case we missed something in the rehab.

I also get at least 3k down. I don’t know if your buyers have this much down payment, but it covers your fixing if they don’t get financed and mess up the house some.

Good luck, and let me know what you decide, and how it turns out. It’s a tough decision.

Laure :slight_smile:

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Yes yes! do it! - Posted by MDonovan FL

Posted by MDonovan FL on March 10, 2000 at 14:17:18:

There are many reasons why its the best way to go. Its not dealer property. You make the option exercisable between month 12 and 18, so you are an “investor” to the IRS. This allows depreciation, expenses, no SS/medicare, ability to do a 1031 at the sale, etc. You can sell for 10% above FMV and your tenant/buyers will not even try to negotiate the price. Give them a six month warranty on the heat pump and the roof, and everything else is their responsibility. You can rent for 10% above fair market rent, because your T/B’ers are “buying their own home.” The banks have already said “no,” so they are very happy to find you. They will not trash your house – its theirs. They will more likely fix it up. You can sell a junker to a handyman T/Ber and they will give you a premium. This means that your tenants will do your rehab for you. You can reimburse them for materials as they complete each job, and add these costs to the purchase price. If they quit, you get to keep the free labor. And that’s about 70% of rehab costs these days. You will get 3-5% of the FMV for option consideration, plus a month’s rent deposit. If you keep copies of the rent checks, you can get them a loan with refinance terms: cash out, fees rolled into note, reasonable interest, lenient qualify, etc. At closing, put the cash into a 1031, buy five more houses within six months with this cash, and pay NO taxes. Can you say compound interest?

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Re: Do I dare “rent to own” my rehabbed house? - Posted by Ben in Ohio

Posted by Ben in Ohio on March 10, 2000 at 07:00:41:

ROn-- I have been there. Here is what I have done in the past. You can find good and bad tenants in every price range. To see how they live go to their house and fill out the L/O app. It doesn’t matter if its SEC 8 or some other program, don’t be afraid of subsidies. In may case, people are in a temporary tough spot, in other cases they abuse the system, and will abuse your house, but not ususally. The key here is proper screening.

I have been very successful contacting my local churches, homeless shelters, social service agencies, Realtors. Let them know you have property available from time to time. Today, I am getting calls every day from propspective tenants. The more calls, the more screenings, pick the cream of the crop.

DOn’t worry about them trashing your house. Simply manage the property, perform monthly inspections. If you are really concerned, ask for a first, last, security.

When you find the tenant you like, offer a RTO. ALso, there are a ton of zero down, 3%, 5%. DOn’t woory, you are doing fine. As I recenlty heard at my local REIA meeting from Sidoti BUY, BUY, BUY. He does nothing except buy and rent. BTW, he has a great rental stucy course.

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The only thing less fun than rehabbing . . . - Posted by JoeKaiser

Posted by JoeKaiser on March 10, 2000 at 02:02:57:

. . . is rehabbing the same house over again.

You may want to think long and hard about turning a rehab into a rental. I know people do this, but I can’t figure out why. I suppose if it was a property you planned to keep, then it would be a necessary evil, but that house likely goes down in value the moment your tenant moves in (if this thing doesn’t work out).

Joe

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Why rent to own when you can migtht sell it now? - Posted by Michael Morrongiello

Posted by Michael Morrongiello on March 09, 2000 at 22:25:24:

Ron:
The first inclination sellers do when a home has not moved is to lower the sales price. Why not consider offering FINANCING? Easy to get into Financing sells properties FAST not price and a lease opton is really almost a form of financing with one BIG exception; Your CASH is still tied up into the home pending the outcome of the option.

WHY rent to own when you haven’t explored selling that home by offering owner assisted financing to expose it to many more potential buyers in the marketplace and move it fast.

With owner financing offered and then a subsquent sale of the note , you get back to a cash positon so you can invest again in other opportunites rather than have your cash tied up in this home.

Of course if the owner financing does not work you can still always go the lease with an option route.

Michael Morrongiello

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Re: Do I dare “rent to own” my rehabbed house? - Posted by Bert G

Posted by Bert G on March 09, 2000 at 21:36:04:

OK. Heres the really condensed lease-option selling course.

First, make it a year lease. Make the option agreement a separate document. Include in your lease provisions where the tenat is responsible for all but major repairs. Get as large a (refundable) security deposit as the law and your concience will allow. Also have them give you a substantial “option consideration” that is NOT refundable. It is applied to the purchase price of the house only if they buy; if they don’t buy you keep the option money. Write your lease so that if the bother you for clogged toilets etc, or you have complaints from the neighbors, that months rent premium is lost. You set your price up front. If you like, charge a premium rent, and apply a portion of that as additional option consideration. Again, if they buy, that applies to the purchace price. If they don’t buy its yours to keep. If they miss a payment, you evict them, and all the option money they’ve paid is yours to keep. That should give them an incentive to buy the place and keep it up. If they do leave without buying, start over again with someone else.

Ilearned all this from Bill Bronchick. In about a month I’ll have my rehab finished so I can try it out for real.

BG