In the previous post I  discussed each contract and the basic points each covered.  Today, I am going to share with you the specifics of a Rental Agreement, the type you should have and some of the key clauses that should be included in the agreement.

Most good Rental Agreements take the guesswork out of the picture for you, making your life significantly easier. They do this by having all of the regular terms and conditions pre-printed. One important thing to remember is that you should NEVER draft your own rental agreements (or any other contracts for that matter) from scratch. Always use pre-created contracts (preferably pro-buyer) and just fill in the relevant details. Creating your own contracts can cause you enormous headaches and potential legal problems.

There are three different types of contracts:  Pro-Seller, Neutral and Pro-Buyer. You, as the buyer, will want pro-buyer contracts for your transaction, whenever possible. You can order these on my website if you don’t already have them. They offer you the most protection and the most favorable terms.   The type of contract can make a HUGE difference.  If you use the pro-buyer contracts, the seller is responsible for all repairs, or you can choose to share the expenses. Using a pro-seller contract or a lease from a real estate agent could result you might end up being responsible for ALL repairs to the property during your rental period.

Here are a few clauses you will find in my rental agreements that make them pro-buyer.

Insurance

It’s very important that the owner continue insurance. He or she is responsible for insuring his home during the rental period, not you. You will want to obtain renter’s insurance to protect your possessions, but the home itself must be insured by the owner (seller).

Maintenance, Repairs or Alterations

The Landlord gives the tenant the right to make repairs or improvements to the property at the tenant’s expense. This is where you will want to put in who will pay for what repairs. I personally like the owner to pay for repairs during the option period when I am the buyer.

Rental Payments

It is very important when you are doing a lease option that you make SURE the seller is paying his mortgage payment.  If he doesn’t pay it, your dream will become a nightmare.  I recommend you have your monthly payment made to their mortgage company versus to the seller directly.

Check out Chapter 7 of Rent-to- Buy for more insight into Rental Agreements.  Rent-to-Buy is a great gift for the Holiday’s.  Order  your copy  TODAY!!

Once you have set a budget and know how much you can afford for a home, it’s time to start thinking about what features you want and need in a home. Needs are things that, if they aren’t met, they won’t make the home functional for you or your family. Consider your needs, not just now, but also for the next few years. For example, if you don’t have any children now but plan on having some over the next few years, a one-bedroom cottage probably won’t be a good choice for you. On the other hand, if you have five kids, a home with one bathroom is just not practical. Take a look at your situation. If you have owned a home before it will be easier for you to determine your needs than if this is your first home.

It is important, however, to get an idea of your needs before you go out looking at homes so you aren’t just floundering around. It’s okay to refine your needs as you are looking at homes and think more about your future home, but decide on your basic must-haves beforehand.

Here are some basic needs you’ll want to consider:

1. How many bedrooms and How big do they need to be?
2. Do you need a garage?
3. Do you need a basement or other structure for storage, like a shed (of course, you don’t want a basement in Florida)?
4. How many bathrooms will be needed?

Think also about the specifics of your own situation. Will you have an elderly parent living with you? If you or a family member is physically disabled, can the home be two stories or should it only have one? If you have small children, do you need a fenced in yard? It’s impossible to cover every particular situation, but you know better than anyone what applies to the needs of your family.

Once you have established your basic needs for a home, it’s time to think about features you want. Check out chapter 3 of my new book Rent- to-Buy for an in dept look at how to establish your needs and wants.

Are you like many others who have no idea what a Rent-to-Own is? My new book Rent to Buy discusses what a Rent-to-Own is and much more. Rent to Buy offers a hands on guide to buying a home on lease option from the home buyer’s perspective as well as the real estate agents who serve them.

Before we can look at why we would want to buy a home and how to buy a home on a “rent-to-own” basis, we first need to understand what renting-to-own is. A rent-to-own can also be referred to as a “Lease with an Option to Buy,” a “Lease Option” or a “Lease to Own.”  In this book we will call it a “Rent-to-Own”, but these words can be used interchangeably for the most part.

In a nutshell, a rent-to-own sale means the seller is allowing you, the future buyer, to live in the home for a while as a renter before you actually purchase the home from them.

In a rent-to-own transaction, before you move into the seller’s home as a renter, you and the seller would agree on the sale price and other terms. You would pay the seller a non-refundable option fee. Both you and the seller would sign some paperwork covering the lease, the purchase and the option (which gives you the right to purchase the home at a later date) and in approximately one to three years, depending on your agreement, you have the option of purchasing the home.

I say you have the option of purchasing the home because it is important to understand that in a rent-to-own transaction you, as the buyer, are not obligated to purchase the home at the end of the rental period. The seller, however, is required to sell it to you should you choose to buy it. That sounds pretty good, doesn’t it? For a more in dept look  at Rent-to-Own’s check out my new book, Rent-to-Buy.

While this housing slump is making it tough for home sellers, there is a balancing factor that’s making it tough for home buyers.  I call it the “Credit Crunch”.

With the severe tightening of the mortgage lending industry, buyers are having a harder time getting mortgages. The subprime mess we’ve all heard about means that many buyers who could qualify for mortgages before are no longer able to. This may be your situation.

This “Credit Crunch” directly impacts you as a potential homebuyer. Unless you have A+ credit or a very large down payment, getting a mortgage may prove difficult. If you haven’t already spoken with a mortgage broker, you should do so to find out if you can currently qualify for a mortgage. If you have already spoken with a mortgage broker and you know you can’t qualify yet, you know about this “Credit Crunch”.

Many would-be buyers despair after talking to a real estate agent and a mortgage broker who tell them that they can’t help them because they can’t qualify right now. This is why you, as a buyer, would need to do something like rent-to-own. It gives you the opportunity to get into your future home now, before you can qualify for a mortgage.

You can learn about How the “Credit Crunch” affects You- The Buyer and more in my new book Rent to Buy. Rent to Buy is your hands-on, step by step, guide to buying your next home as a rent to own.  You can get your next home NOW without having to qualify for a mortgage until later.  This is the solution you need until you can qualify for a mortgage.  This is the solution home sellers need because they can’t find mortgage qualified buyers.  Rent to Buy is a great option in our current real estate market.  Check it out!

Is this you?

You’ve seen tons of homes for sale on the market.  You know it’s a buyer’s market.  You either owned a home previously or you are a first time buyer.  If you owned a home previously you might have lost it to foreclosure, either due to a job loss, divorce or your mortgage rate adjusting upwards.

Now is the time to buy!  After all, you keep hearing in the news about how BAD things are for sellers, and prices are the lowest they’ve been in years. This is true and it is to your advantage.  For most of us, home ownership is our single, biggest source of wealth.  It not only puts a roof over our heads that we can call our own, but it also builds security for our futures by paying down the mortgage and building up equity. For most people, their home is their single greatest asset.

Probably the first thing you did was to start looking on the Internet or checking the local newspaper for homes for sale.  After that, you called a Realtor® and he told you that he would love to help you, but you needed to get approved for a mortgage first. Ugh…you know you don’t have the best of credit and you are not sure if you should even call a mortgage lender.

You decide to make the call to a mortgage lender.  You know what the outcome will most likely be in advance, because of your financial situation, but you do it anyway. After gathering tons of information from you all the way down to how many times a week you floss, he finally tells you that based on your current credit, income, down payment, inadequate amount of time spent brushing after meals, etc. you aren’t currently qualified to get a mortgage. Well, duh! You could have told him that in the first place.  Do not despair.

Rent to Buy is now available.  Rent to Buy is your hands-on, step by step, guide to buying your next home as a rent to own.  You can get your next home NOW without having to qualify for a mortgage until later.  This is the solution you need until you can qualify for a mortgage.  This is the solution home sellers need because they can’t find mortgage qualified buyers.  Rent to Buy is a great option in our current real estate market.  Check it out!

In today’s real estate market mortgage-qualified buyers can be a real challenge to find which makes it difficult for us real estate agents to make a living.  In reality there are lots of would-be buyers out there right now if you are a little more creative.  You see, the real hang up comes with the mortgage-qualified part.  Lots of would-be buyers out there (in fact, I would say the majority) can’t qualify for mortgages right now.

Most real estate agents turn these people away saying, “I’m sorry, I can’t help you.”

But the truth is, if you are a little bit creative, like I teach in my book Rent-to-Buy, you can turn all of those buyers into full commissions by finding them a lease option home.  Not only that but you can collect buyer leads from other agents who turn away those not-mortgage-qualified buyers too!

How do I do that?  I have this letter that I send out to other agents called my garbage or $500 letter.  It goes something like this:

Dear Agent Name,

Have you ever had a potential buyer come into your office and not be qualified to get a mortgage?   Don’t throw away their information.  Refer them to us, and if we end up renting to them, we will send you $500!

So, is it a piece of garbage, or $500?

Please call us at (phone number) to get more information, but don’t throw away your potential buyers that we might be able to work with.  This offer is valid until (date).

Sincerely,

Your name

Very simple and straightforward, but very powerful.  Most real estate agents turn away non-mortgage qualified buyers.  Get them to give them to you instead and they’ll see a payout instead of a lead that is garbage.

The buyers are the gold in today’s real estate market.  If you are creative and help non-mortgage-qualified buyers find lease option homes you can earn a TON of money in commissions right now.  For more on how to do lease options as a real estate agent and how to help buyers find homes check out my new book, Rent-to-Buy.

Here is a tip on negotiating from my book Rent to Buy, which will be released on November 10th.  Rent to Buy is a hands on guide to buying a home on lease option from the home buyer’s perspective as well as the real estate agents who serve them.

One of the great things about buying a home as a rent to own is that you have a broad range of terms to negotiate when putting together the deal on your rent to own home.  This means that you can get creative and put together a deal that is good for you as the home buyer, or the real estate agent who is assisting their buyer, as well as still be good for the seller too.  If it’s a win-win situation you’ll have a much better chance of getting the home.

So here is one of the negotiating tips I talk about in Chapter 12 of Rent to Buy:

Don’t Give Away Anything without Asking for Something in Return

This tit-for-tat technique helps ensure that even if you are giving your sellers a key aspect that they want; you are getting something in return.  A good way to handle this is with a question, “If I agree to your asking price, how much per month in option credits do you think is a fair exchange?”

Or, you can ask for exactly what you want, “If I agree to your asking price, would you agree to give me $1,000 per month in option credits?”

By asking a question, you give the seller a chance to voice what they think is a fair exchange for what they are asking for.  It may turn out to be MORE than what you would have asked for.  If it isn’t enough, you can always negotiate up from their proposal.

By stating what you want, you are more limited.  The seller may even try to negotiate you down from this position.  However, if there are a few key things that you really want out of the negotiation, this is a good time to go after them.

I’ve trained real estate agents across the country in lease options, teaching them how to help their clients.  But I still run into agents who don’t want to do them.  That’s okay, but sometimes agents just need to learn a little more about lease options to open their minds.

Lease options can be great both for home buyers and home sellers.  They aren’t the perfect solution for every situation, but there are many cases, especially in our current real estate market where an agent could significantly increase their commissions by putting together lease option transactions and help their clients.  Let me give you some example situations where a lease option could be good for a Realtor and increase their commissions:

• Have you ever had a potential buyer come to you who has not tried to qualify for a mortgage yet so you refer them to a mortgage broker and then never hear back from them?  Let’s face it, a lot of would-be buyers out there can’t qualify for mortgages right now, but they still want to buy a home.  These are perfect lease option buyers.  Just because they can’t qualify right now doesn’t mean they won’t be able to qualify later.  Why not tap into this pool of buyers and get paid instead of turning them away and watching another commission check walk out the door.  And it’s only going to get worse.  The new rules for credit scoring are being implemented that is making it harder for some people to qualify right now.  Plus the credit card industry is tightening things up.  I know of one buyer who could have qualified for a mortgage two months ago that can’t now because the credit card companies have changed so much.  He had one account closed on him and two others where they reduced his available credit to just above his current balance.  That had enough impact on his credit score that he could no longer qualify for a mortgage.  And he never even so much as had a late payment with any of those credit cards!  So instead of having to be stuck renting, this would make a great lease option buyer.
• What about the sell side?  Do you have any listings where your client has told you that if they can’t get their home sold soon they are going to have to rent it?  This makes for a perfect lease option seller.  You already know that they are considering renting their home plus you know that they really want to get their home sold.  How much of a commission do you make if all you do is find a renter for someone?  Squat!  With lease options you can still get your full commission!

This is just 2 examples of why Realtors should consider lease options and two ways that any agent can increase their commissions right now.  If you want to learn more about lease options take a look at my books Rent to Sell and Rent to Buy.  They are a great resource for any real estate agent.

Whether your are a lease option investor, a real estate agent or a home seller or home buyer, anyone involved in a rent to own transaction has the same points to look out for in negotiation.  I’m not going to cover all of the negotiation points here but I’ll focus on a few of them.

1. Monthly option credit – This wold be a portion (or all) of the monthly rent which is credit towards the purchase price ONLY if the tenant-buyer exercises the option to purchase.  This credit is in no way mandatory, but can be very helpful to the buyer when it comes time to purchase.  If a seller is granting option credits they need to have enough equity in the home to cover them

2. Monthly rent amount – Typically rents are priced at market rent or a little bit more on a rent to own transaction.  However, this amount can always be negotiated to make it better for you.

3. End purchase price – the amount the buyer will actually pay for the home once they exercise the right to purchase.  This final amount will determine the buyer’s new mortgage payments.  It will also reflect the net proceeds for the seller.  Most rent to own sales command a slightly higher purchase price, possibly as much as 5% to 10% more depending on the strength of the real estate market in your area.

Want to know more about key points to negotiate in rent to owns?

If you are a lease option investor you’ll want to read “Investing in Real Estate with Lease Options and Subject To Deals”

If you are a home seller or real estate agent you’ll want to read “Rent-to-Sell”

If you are a home buyer or real estate agent you’ll want to read “Rent-to-Buy” (coming soon)

All of these books are available on Wendy Patton’s website

Any real estate investor, home owner or home buyer that does a rent to own deal needs to understand the process involving the appraisal of a lease option home when it comes time for the end buyer to purchase. The purchase price is agreed upon at the onset of the rent to own.  Because the sale of a rent to own home takes place over time the home may go up or down in value by the time the end buyer is ready to purchase their lease option home.   When it comes time to buy the rent to own home the buyer’s lender orders an appraisal.  Three things can happen with that appraisal.

1. The lease option property appraises for the amount of the agreed upon purchase price.  If this is the case everything can proceed forward without problem for the real estate investor, the home seller and the home buyer.
2. The rent to own home appraises for MORE than the amount of the agreed upon purchase price.  In this case as long as the buyer has lived up to all of their obligations in the option contract, the home seller or the real estate investor MUST sell for the agreed upon purchase price.  The buyer benefits from the extra equity.
3. The lease option home appraises for LESS than the amount of the agreed upon sales price.  Of course we hate to see this happen, but sometimes if real estate markets are in decline it can.  If this is the case, the home owner and the real estate investor are only obligated to sell for the original sales price.  The buyer wouldn’t be able to qualify for a mortgage at that price so the deal would fall apart.  While the home owner or the real estate investor are not required to sell the rent to own home for a lower price they may choose to.  Let’s face it, the home has gone down in value, so they won’t be able to sell it to anyone else for more.  The may want to drop the price to the appraised value so the buyer can complete the sale.

These terms are part of the lease option contracts that are so important when doing a rent to own sale.  I explain them in great detail in my books, Rent to Buy, and Rent to Sell.

Also, take a look at this video where I talk about the appraisal versus sale price.