Rent or Rent to Own ??? - Posted by Steve(MD)

Posted by randyOH on October 22, 2003 at 11:53:31:

Yes, get the option fee upfront. I tell the tenant how much they will need to put down during the initial discussions. Then, when I prepare the docs, I just allocate a small amount as a security deposit on the lease. So maybe $1,800 option fee, $200 deposit.

I just use a standard lease agreement form I got through our local landlord assoc. I got the option form off the internet, but I cannot remember the site. Try an archive search here and maybe a general Google search. I think you will find many postings about forms here.

Good luck,

Rent or Rent to Own ??? - Posted by Steve(MD)

Posted by Steve(MD) on October 21, 2003 at 21:40:04:


I have a 3br/1ba rowhouse that I’m planing to rent. Rent is $850/mo, house FMV ~65k. A lady is interested in “rent to own” and I’m puzzled as to how to structure the rent-to-own scenario for this. I’m planning to raise the rent by $100 ($950/mo), and give her rent-credit may be (upto) $125 towards her PURCHASE PRICE. And the asking price will be 69,999 at the end of 3yrs (see calculation below). I’m assuming 3% appreciation. The property is in a decent (if not the greatest flourishing) neighbourhoods.

65,000 * 1.03 = 66,950 (1st Year)
66,950 * 1.03 = 68,958 (2nd Year)
68,958 * 1.03 = 71,027 (3rd Year)

Also, the T/B wants to improve the house by finishing the basement and adding the bathroom to it and install an alarm system - she’ll probably pick up the expenses for all this.

Questions -

  • Should I let the T/B improve the house now OR let her be in the house for a year and then give her the permission to do the above said modifications ?
    *** Then I fear that I might loose her thinking that I’ll not satisfy her needs.

  • Guidance about how to lease-option the property ?

Just basically, I’m new to all this and some explanatory guidance would be very helpful.

Steve (MD)

Re: Rent or Rent to Own ??? - Posted by Brent_IL

Posted by Brent_IL on October 22, 2003 at 05:22:12:

It?s nice to acquire a free bathroom. It?s not so nice if the improvement is shoddy. A subsequent buyer probably wouldn?t be too thrilled.

If you are going to allow her to work on the property, insist that the work be done by licensed and bonded contractors, and that failure to pay a mechanic’s lien within 30 days of billing is a material default of the option agreement that automatically cancels her right to buy, but does allow her to continue to lease from month to month. I really prefer PACTrust-type trust arrangements for this kind of thing, but that?s beyond the scope of the question.

In my area, the long-term rent ratio for entry-level SFH?s ranges around eight-tenths of one percent of market value. You?re getting 1.3%. If this is normal for your area, I agree with Randy to shorten the term and bump the price. I?d try a $75,000 strike price with a credit for approved repairs against the purchase price. I also agree with Doug that you could ask for more rent in exchange for a larger credit off the option price.

If I could get 1.3% on a straight rental, I wouldn?t want to take a chance on the option being exercised. I?d put the property in trust for my kid?s kids. But, that?s based on rents in this location.

Re: Rent or Rent to Own ??? - Posted by Doug Pretorius

Posted by Doug Pretorius on October 21, 2003 at 23:16:23:

Rent to own is definitely better than straight rental. You can raise the price as Randy suggests, but since most tenant/buyers never close, chances are you’ll never see that money. Personally I’d go for a higher monthly payment because that’s money you get regardless of whether they buy or not. 11% above rent is pretty low, I’m getting 25%.

Go for it… - Posted by randyOH

Posted by randyOH on October 21, 2003 at 22:54:24:

I have been doing pretty much what you are proposing and it has been working great. 10 times better than straight rentals.

You seem to have the program down pretty well. I would just make two suggestions. First, I would cut the term back to two years. That is the longest I have heard anyone recommend. And, two years should be long enough for the tenant to resolve her credit issues. My second suggestion would be to increase the option price a little if you can. You should be able to get 10% over the current value. So maybe $72,000 would work.

You did not mention an option fee up front. But rule of thumb on that is 3% to 5% of the option price.

I would also let her do the work on the basement. I don’t see much risk of damage to the property and it will probably add some value. You may need to make some allowance in the option fee for this.

You should also use separate option and lease contracts.

Good luck,

Re: Go for it… - Posted by Steve (MD)

Posted by Steve (MD) on October 22, 2003 at 11:06:38:

Should I get the option fee upfront ? Waht about the security deposit then - should I get the option fee instead of the SD ?
Also, Which forms do you use for this ?
I know various sites that offer the legal forms but if you can recommend form names, I would appreciate it.