Rent to Own – What to know before you sign? (for buyers & sellers)

Welcome back,

Most of us just want to be treated fairly. We expect to honor/fulfill the things we agree to, and we expect our sellers, landlords, or tenant-buyers to do the same. Obviously, things don’t always work out as we’ve planned.

In this article and video below we will outline the rent-to-own process, common mistakes, and how to protect yourself moving forward. The content below is both for buyers and sellers planning to use or participate in a rent-to-own type of program selling/buying a single family home or mobile home.

What is Rent to Own?

The term rent-to-own is a loose term to classify types of contracts where a resident or tenant-buyer will be making monthly payments with the possibility to one day own this home in the future, typically for an agreed-upon price at a specific date. A percentage of the tenant-buyer’s monthly payment may or may not go towards the purchase price of the home.

How it works?

Depending on your specific situation, who you’re working with, your state, and other factors the paperwork you use/see/sign will vary. In most states there is no Realtor or State approved Rent to Own type of contract/agreement. This means that the contract you will use/see/sign will vary. The old saying, “If you ask 10 different people you may likely get 10 different answers” comes to mind. In short, always understand the exact paperwork you are using and signing.

✔ Very beginning: In the very beginning a buyer and seller should come to a verbal understanding about how and what is for sale. The price, condition, and terms should all be clearly understood by all parties. A thorough background and credit check should be completed on all potential adult tenant-buyers. Additionally, all potential tenant-buyers should clearly understand the situation, process moving forward, and ask as many questions for clarity as needed.

✔ Beginning: Paperwork is signed. First month’s payment and a non-refundable move-in fee are paid by the tenant-buyer(s). Keys are handed over. Tenant-buyers turn on all utilities and move-in.

✔ Middle: Payments are made monthly to landlord/owners. In some situations it may be wise for the tenant-buyers to start proactively improving their credit scores.

✔ End: At the end of this contract/agreement the tenant-buyers will ideally become the legal owner of the property. This typically requires the title(s) and/or deed to transfer ownership into the tenant-buyer’s name(s). At this point there are a few things that may happen:

✔ Ideally: The tenant-buyer successfully obtains a new loan to purchase the property at the already agreed upon price.

✔ Excellent: The owner/seller of the property agrees to owner-finance the property to the tenant-buyers from this point forward. This option removes the need for the tenant-buyer to find conventional financing. The deed transfers in the tenant-buyer’s name and a note/mortgage is created to secure seller’s interest.

✔ Not Good: If tenant-buyers cannot obtain a new loan, and the owner/seller will not agree to owner-finance the property, then 1) the contract may be extended if agreed to in writing to give the tenant-buyers more time to become bank approved or 2) either party may back out of the contract if in default. (The reason the agreement will likely be in default is because the tenant-buyer will not be able to secure a new loan, or money from some other source, at the agreed-upon contract end-date.)

✔ Is this a mobile home inside of a pre-existing park? If a mobile home is inside a pre-existing park then the contract may say that no additional steps/payments are needed once the tenant-buyer completes making 100% of the agreed monthly payments. This means that at the contract end-date no additional money, or possibly a final small balloon payment, may be owed to the seller; at which point the title/ownership should switch into the tenant-buyer’s name(s).

Having more clarity about a situation is typically better than having less clarity or being confused. However without years of experience you may obviously not know the right questions to ask or what to watch-out for. Any specific questions you have never hesitate to comment below or reach out to the email address below.

Problems for Buyers typically come from…

Are you a potential tenant-buyer planning on buying a home via a rent-to-own agreement? Please watch the first 20 minutes of the video above.

It is important to be cautious while going into these types of contracts. Remember that not everyone will be honest, ethical, or have your best interest in mind. For these reasons and more it is financially important to understand 1) the process moving forward, 2) exactly what you are buying and all the repairs needed, and 3) exactly what paperwork you will be signing and why.

It may also wise to do a handful of other things prior to moving forward. Some of these to-do’s include:

• Check ownership.
• Check property taxes.
• Underlying lien or debt? Ask for a recent mortgage statement or coupon to verify payments are current.
• Know all repairs needed. Hire a property inspector? Renegotiate price or terms?
• Read all paperwork prior to signing and ask all your questions (get answers in writing if possible).
• More to-do's outlined in the first 20 minutes of the video above.

Problems for Investors typically come from…

Are you an investor planning on selling an investment home via a rent-to-own contract? Consider watching the entire video above.

Let’s sell this property with the intention of never getting it back. It may be wise for you to attract and approve not the first buyer with money, but the most appropriate and low-risk buyer(s) for the property.

First things first, ideally the subject property was purchased with this specific rent-to-own exit strategy in mind. It may be wise to understand your realistic exit strategy’s price and terms before ever making offers to purchase any subject investment property. The goal is to be quite profitable while selling a desirable/safe property for a win-win and attractive price/terms for the local market.

Pro Tip: Do not aim to take advantage or gouge your tenant-buyer’s monthly payments. Affordable monthly payments will attract more buyers to your property. The more buyers the higher the likelihood of finding the correct low-risk candidate for your property.

Before signing paperwork with your potential tenant-buyers it may be prudent to complete your due diligence process. Some of your selling due diligence may include:

• Knowing your realist exit-strategy and price/terms.
• Complete and thorough background/screening of all potential adult tenant-buyers.
• Disclose all known repairs to potential tenant-buyers.
• Completely understand all your paperwork and your sales process moving forward.
• More due diligence for investors outlined in the video above (after minute 20).

Common ways Buyers may get taken advantage of…

Ideally you will never have to go through a situation where you’re taken advantage of in a rent-to-own type of home deal. However if a mistake or error is made it will likely be for a few different main reasons:

• The seller is preventing you from purchasing the home in some way.
• The seller does not have the right or ability to sell the home for a variety of reasons.
• The home is in a location, condition, or legal situation that prevents you from purchasing the property.
• Market crashes, interest rates increasing, and/or lending practices changing may cause potential problems obtaining conventional bank financing when/if needed.

The list above is absolutely not complete, and is very vague due to a variety of potential mobile home and manufactured home situations. Please watch the first 20 minutes of the video above to have a better understanding of various situations you may run into.

Common ways Investors may get taken advantage of…

It is important as investors to have full clarity and understand the proper steps you may wish to proceed with moving forward. It is typically the investor that controls paperwork; ideally the contracts you use should thoroughly protect all parties involved. Additionally, a thorough and complete background check and vetting process should allow you to pick the correct low-risk tenant-buyer(s) for your property.

When investors get taken advantage of it is typically for a few main reasons:

• The investor procrastinated and/or did not take action to correct an issue immediately.
• Faulty paperwork.
• The investor failed to complete an important piece of due diligence prior to purchasing the investment property and now there are unforeseen issues.
• The investor failed to complete an important piece of due diligence prior before approving this particular sketchy tenant-buyer(s).
• The investor followed his or her heart instead of logic. (This will likely happen to you. Possibly more than once.)
• Market crashes, interest rates increasing, and/or lending practices changing may cause potential problems obtaining conventional bank financing when/if desired.

Disclaimer: Understand all local and state laws prior to moving forward with any lease purchase or rent-to-own type of situation. In various states there may be limitations to which homes may be sold via a rent to own agreement or the total number of months a contract may run before ownership is transfer, etc.

If you’re planning on purchasing or selling a property via a rent-to-own agreement remember to ask questions and have complete clarity moving forward. Most mobile homes and single-family houses are very different from one another. Likewise, every unique seller and/or buyer is a very different person with their own flaws, attributes, weaknesses, and moral compass. Aim to move forward proactively, cautiously and strategically.

Lastly, throughout this entire article we did not talk about loving the property you are buying. If you are planning on purchasing the property to live inside then make sure you fully understand the neighborhood and location of this property. Drive through the area at night and potentially even meet some of the neighbors. As always, if you ever have any questions or concerns now or moving forward never hesitate to reach out or comment below.

Did we miss anything? Please feel free to comment mobile home concerns below.

Love what you do daily,
John Fedro
support@mobilehomeinvesting.net

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