For a majority of Americans, home ownership is part and parcel of the American Dream. However, with today’s unabated rise in the cost of living, higher home prices, and increasing inflation, that dream feels further and further out of reach. In the U.S., the average home price-to-income ratio is 4.6, but in Florida, it is even higher at 5.3! With ever-increasing unaffordability, you’d think that the majority of people would be consigned to being renters forever.
This has a lot of people, particularly millennials, looking for alternative ways of buying a home. And it’s not easy. Probably the biggest hurdle for aspiring home buyers is coming up with the cash for a down payment, usually 20% of the selling price.
Enter rent-to-own programs.
With rent-to-own, this requirement is usually done away with, which is why this program is finding increasing popularity in Florida.
Sounds good for the buyer, but what about the benefits to the seller? You’ll have to read this article to find out.
What is Rent-to-Own?
A rent-to-own is essentially your good old lease agreement with the choice of buying the property later. The “tenant” will be able to transition into becoming a buyer at a predetermined price. Depending on the contract, a portion of monthly rent can go towards the purchase price, chipping at it bit by bit, akin to building equity.
The Rent to Own Agreement
Here are the contents of a rent-to-own contract:
- The purchase price can either be locked in or flexible to reflect current market trends by the time the purchase date rolls around (i.e., if there’s a good chance of future appreciation).
- The monthly payment and how much of it, called rent credits, goes toward the sale price
- The option fee, which secures the buyer’s right to acquire the home
- The date when the buyer can purchase the property
- Who is responsible for maintaining and repairing during the rental period
- What happens if the tenant buyer falls behind on payments
In Florida, it is important to get all of these in writing. It would also be worthwhile if you hired a real estate lawyer in order to draft this contract for you to ensure that all your bases are covered and that you and your buyer are protected throughout.
Can I Sell My House Rent-to-Own if I’m Still Paying for My Mortgage?
Yes, even if you’re still paying for your mortgage, you can sell it via rent-to-own. However, it is important to get approval from your lender, as it can potentially be a violation of your mortgage agreement, especially if it has restrictions on selling.
You must also understand that you remain fully responsible for the mortgage payments, no matter what happens, even if you no longer live there, since the contract between you and your lender must be honored until the ownership fully transfers to your buyer. And since you’re essentially making different agreements with two unrelated parties, it can be argued that a real estate attorney’s expertise is invaluable. Not only will their guidance keep you from getting into future legal troubles, but it will also help the process play out smoothly for everyone involved.
When selling rent-to-own with a mortgage, you can set up the rental agreement so that it covers your mortgage costs during the transition. Otherwise, you’ll need to pony up the cash to make up the difference every month in order to stay in good standing with your mortgage provider.
Are There Different Types of Rent-to-Own Contracts?
Lease Option Agreement
From the name itself, a lease option agreement gives the buyer the opportunity to acquire the property at the end of the lease. With this type of contract, there is an upfront, non-refundable option fee of around 5% of the purchase price. With an option, the buyer is not bound to proceed with the purchase at the expiration of the lease, and they can simply walk away without facing legal ramifications.
Lease Purchase Agreement
On the other hand, with a lease purchase agreement, the buyer will be required to go through with the purchase once the lease ends. If they change their mind, or they don’t qualify for a loan to afford the property, any and all deposit or rent credits will be lost. Additionally, they might be required to pay penalties and potentially be subject to legal action.
How Does a Rent-to-Own Contract Benefit the Sellers?
Steady Revenue
With a rent-to-own home sale, you’re practically getting a guaranteed monthly income for as long as your agreement lasts. Additionally, you get to collect a 5% upfront option fee, which you get to keep regardless of whether your buyer decides to purchase or not. And with Florida’s median home price sitting at $417,000, this option fee of over $20,000 is nothing to sneeze at.
Contrast this with being a regular landlord. Yes, you also collect a deposit of up to two months’ rent at the beginning of the tenancy, but you’re required to return it within 30 days of the tenant moving out. With rent-to-own, this option fee is completely non-refundable.
Increased Rent, More Income
As a landlord seller, you also have the option of increasing the rent by offering rental credits. These rental credits will go towards the property purchase price, so at the end of the lease agreement, your buyer will need financing for a smaller amount. For example, they always pay on time and with a $300 rent credit every month. By the end of the two-year lease, they would have put $7,200 towards the purchase price. This is a win for serious buyers. On the other hand, if they walk away from the deal, you’re under no obligation to return these credits.
Maintenance and repair are handled by the tenant
Since the “tenant” will be the eventual owner, all maintenance and repair will be handled by them. This must be clearly stated in the lease agreement to avoid conflicts if ever something breaks down in the future.
Save on Commissions
Since the transaction is directly between the buyer and the seller, real estate agents are not involved. Therefore, there’s no 6% commission to be shaved off from the profits that you’ll be making from the sale. Bottom line: you make more money.
What are the drawbacks of rent-to-own for the seller?
Possibility of Non-Purchase
At the end of the lease, there is no guarantee that the buyer will qualify for a traditional mortgage or that they have saved enough for a down payment. End result? A non-purchase. And you’re left with a house that may or may not be in a worse condition than before you rented it out. You’ll be forced back to square one, where you’ll start the process all over again, or maybe, if you’re tired of it, you’ll just end up putting it on the open market after expending some effort and money on renovations.
Neglect of Property
Since the tenant is solely in charge of maintaining and doing repairs on the property as necessary, they may neglect it, especially if they decide not to buy it. Instead of earning money at the end, you might end up spending more on repairs.
Locked-in Price
While a locked-in price can provide certainty for both you and the buyer, if the market appreciates significantly, you might end up on the losing end. This can be avoided by carefully studying market trends in order to set an appropriate price by the time you draft the lease agreement.
Sellers Must Continue Making Mortgage Payments
You can be stuck paying for two mortgages for the duration of the lease: one for your primary residence, and the other for your rent-to-own. If you don’t have a significant buffer, this can be financially stressful. And if the deal falls through and the buyer walks away, you can be thrust into a precarious position and may be pressured into a sale that is not on your terms.
Having to Evict the Tenant
There’s also the chance that the tenant may fall behind on payments and just refuse to leave even when the lease has expired. In this nightmare scenario, you will be forced to go to court to file an eviction lawsuit, which is expensive, time-consuming, and an all-around hassle.
More Stringent Tenant Screening Process
To avoid finding yourself in undesirable situations mentioned above, you have to be stringent in vetting your tenants. This will require investing your time in order to determine whether the tenant is a good fit and will take care of the house as if it were their own. Request rental history and references. Assess their creditworthiness and financial reliability. Do a careful background check to minimize the risk of having to deal with a bad tenant in the future.
Who is the market for rent-to-own houses in FL?
Rent-to-own arrangements in Florida are primarily geared towards aspiring homeowners who have stable employment and income but struggle with saving up for a down payment. It can also be for people who are still building up their credit score until it is enough to qualify for a traditional mortgage with favorable rates. Furthermore, having a rent-to-own arrangement is a good way to check whether the neighborhood is a good fit for the buyer before ultimately settling and putting down roots.
Things to Consider When Selling Rent to Own in Florida
Your success in selling your rent-to-own property in FL largely hinges on your pricing and the terms set out in your agreement. It is advisable to enlist the help of a real estate attorney so that you don’t accidentally overlook something, as the process of selling rent-to-own is pretty nuanced compared to a conventional home sale. With a lawyer by your side, you’re also certain that everything is in accordance with Florida real estate laws, thus precluding the possibility of a lawsuit on your doorstep.
Determine Your Selling Price
There are a few ways of determining your selling price: through a comparative market analysis (CMA), through the use of online tools, and through a professional appraisal.
Comparative Market Analysis (CMA)
Despite the scarily technical name, a comparative market analysis is pretty simple. It entails looking at recently sold local properties, which are similar in age, size, and features, in order to establish a baseline price. You can do it yourself by walking around your neighborhood, checking out houses with the ‘For Sale’ signs out front, or by browsing listing websites. If you have a realtor, they can also do this for you, free of charge, as part of their service.
Online Tools
In this age of the Internet, there is an abundance of online valuation tools based on widely available property data. You will be required to provide some details about your house, such as square footage, number of bedrooms and bathrooms, finishes, etc., before it can give you a reasonable price range that you can work with.
Professional Appraisal
If you’re not up for research, you can just hire a professional to do an appraisal. For a few hundred dollars, you’ll have an accurate valuation for your home, which is very helpful in setting your future purchase price.
Tenant and Landlord Responsibilities
When selling a rent-to-own property, you occupy that ambiguous space between being a landlord and a seller. And the same goes for your buyer-tenant. Since a part of their rent payments goes towards the purchase, which can be analogous to building equity in the home, they can be considered buyers. A distinction is important between the two with regard to who is responsible for maintenance and occasional repair. The seller from whom you bought the house isn’t responsible for your home’s maintenance, are they? Still, to avoid confusion and conflicts down the line, responsibility over the repairs must be clearly specified in the contract right from the get-go.
Indicate the contract duration.
A two-year agreement is standard for most rent-to-own contracts. The logic behind it is that the buyer must have repaired their credit score enough and/or saved for the down payment to be able to qualify for a traditional mortgage in order to exercise their purchase option. In case your buyer asks for a contract extension, there’s really no risk of financial loss, so that can be permitted.
Keep Detailed Records
To protect both you and the buyer, it is advisable to maintain different accounts for different types of payments. Rent payments go into one account, while rent credits go into an escrow account set up for the purpose. You must keep detailed records of this so that transactions can be easily tracked and ensure that both parties are holding up their ends of the agreement.
Final Thoughts: Selling Rent-to-Own Property in Florida
Selling a rent-to-own property has a lot of moving parts. And while the prospect of having a steady cash flow by way of monthly rent payments without the hassle of being responsible for maintenance and repairs can be attractive, it’s not always guaranteed. A lot of this hinges on how meticulous and stringent you are in vetting the buyer-tenant.
But what if your buyer-tenant lets the property fall into neglect and disrepair and they end up not proceeding with the purchase?
You’re going to be left with a distressed property that’s going to cost you thousands to fix. Instead of ending up with a fat stack in your bank account, you’re going to have to deal with a money pit.
If you don’t want to deal with all of that, then you can consider selling for cash outright. And that’s our specialty here at Revival Homebuyer! As one of the trusted cash home buyers in Tampa, you don’t need to work out complex contracts, screen an endless stream of prospective buyer-tenants who may or may not turn out to be a bust, and deal with meticulous paperwork. We’ll even buy your house as is!
Here at Revival Homebuyer, if you fill in our form with your property address, email, and phone number, we’ll send you a free, all-cash offer for your home with no strings attached. As a reliable company that buys homes in Florida, we make the process simple. With no hidden fees, commissions, or closing costs, you get everything that’s on offer! And since we’re local home buyers familiar with the market, you’re guaranteed to get a fair offer for your home.
We’re looking forward to working with you. Contact us at (813) 548-3674 today!
