House Rent To Own.

[Prince]

What are the rules and regulation in relation to rent to own. I have  a house somebody wants to rent to own. Do I have to do like a bank with principal and interest been reported to IRS.Do I have to get Big deposits. Which one is better to sell or rent to own ..get more money in the long run like a bank did. Thanks for the info....Narciso

[jeston]

Hi Narciso,

I'm going to list below by category of sell vs rent to own the pros and cons of each.  My items below are not necessarily ALL the pros and cons, but a list of the major ones that come to mind.

SELL

1.   You get all your money at closing.

2.   You do not have to worry about future maintenance on the property or keeping up with tax bills, bookkeeping, etc.

RENT TO OWN

1.   You will have to draw up both a rental agreement AND a Contract of Sale.  

The rental agreement is like any other rental agreement you would enter into.  You spell out what the tenant is responsible for and what the landlord is responsible for.  In addition, you need to spell out who pays for taxes and insurance and who is responsible for repairs, and what happens if the HVAC goes out, and on and on and on.  The tenant should also be required to carry insurance to cover their personal belongings in the event of fire or theft.  YOU as owner/landlord would also want to carry a rental dwelling policy of insurance on the house itself since you would still own the property.  Don't forget to VERY clearly spell out that if the tenant defaults on any rent payment what will happen …do you want to evict them, or what?  And if evicted or in case of a voluntary move-out before completing all the terms of the Contract, the tenant should forfeit any deposits you are holding.

Your Contract of Sale will be drawn up as a usual Contract would be, but you would make the Lease an attachment to, and a part of, the Contract of Sale.  For the closing date, that would be whatever period of time you agree.

It would also be a wise idea to get a sizeable deposit up front from the purchaser.  Keep in mind that a tenant can do a lot of damage, and YOU are on the line if the tenant defaults and either moves out or is evicted and there are lots of damages to be repaired.

You should probably get an attorney or a Realtor experienced in these type transactions to help you with your paperwork.  Keep in mind that not all Realtors may have experience in this area.

2.   You will receive monthly payments from the purchaser until the contract requirements have all been met.

3.   You retain title to the property UNTIL … whatever requirements you and a rent-to-own purchaser agree on.

A.   You can, for example, say that you will rent for 5 years(or whatever) and at the end of 5 years, the purchaser has to pay you the balance due.

B.   You could, on the other hand, agree to take monthly payments for the duration – until the purchaser pays you off in full.  At that time, and only then, would you transfer title in a true RENT to own.

4.   You do have bookkeeping to do.  You probably would want to structure your rental agreement and Contract of Sale so that a portion of the monthly payment you receive is rent, with the balance being applied to the principal balance of the amount due to purchase the property.

For example, if the payment you would receive is $1,000 monthly and $800 goes toward the rent, with the other $200 being applied to the principal balance due, there is no interest calculation; and you would not have any INTEREST to report.  You would, however, be required to report the $800 monthly RENTAL INCOME to the IRS, just as you would in any rental situation.

You should check with an accountant for accurate and up-to-date IRS laws on Rent to Own because I am not qualified to give you accounting advice.

My personal preference would be to outright sell a piece of property as opposed to a rent-to-own setup.  Your money is in the bank by selling, and you don't have to worry about “if” the payment will come in on time or “if” the tenant will default and move out, leaving you with a lot of damages.

The advantage to you in a rent-to-own would be the monthly income.  You just need to check both credit AND references of anyone you consider entering into this type agreement with.

Good luck to you, and write again if you have additional questions -- and don't forget to rate my answer.

Regards,

Elizabeth Narr