Rent to own homes as a real estate strategy is booming right now. People that were foreclosed on or did short sales won't be able to qualify for a traditional loan for years to come. Their choices basically come down to either renting or owner financing.

Carefully selecting buyers greatly increases an investor's probability of succeeding with the rent to own homes strategy. The pool of people wanting rent to own homes is growing every day. Investors have plenty of buyers to choose from.

Rent to Own Homes are Good for Investors

Rent to own homes strategy is different from the traditional flipping strategy. Traditional flipping involves the end buyer taking out a traditional loan to pay off the investor. The Rent to own homes strategy requires investors provide seller financing for a few years. After between from 2 and 10 years the buyer will be expected to obtain other financing to pay back the rent to own homes investor with a balloon payment.

While the seller financing is in place, the investor can be expected to collect a healthy 8% to 12% interest rate. The rent to own homes strategy is one of the most secure investments with a high rate of return that you will find today.

The large inventory of bank owned real estate is depressing house prices but makes it a great time for picking up rent to own homes at rock bottom prices. The rent to own homes strategy sells these houses for a price approximately 10% above market value. Investors profit twice. Once when they sell the house for considerably more than they bought it for and again when they collect an interest rate that's well above the market rate.

How to Select Buyers for Your Rent to Own Homes

People that have had their credit damaged are not all deadbeats. Plenty were paying mortgage payments on time for years until the economic downturn cost them a job or some other temporary financial trouble hit. Those with a history of on time payments and that are back into decent paying jobs are your best candidates for rent to own homes. The key is the set back has to have been temporary and they have to have recovered.

Along with a history of making on time payments, you need to get a decent down payment. The higher the down payment, the more skin they have in the game. The more skin in the rent to own homes game, the harder they will work to stay current with the payments.

The size of the down payment and their credit history are used to determine the interest rate you will charge. Just like with traditional financing, rent to own homes interest rates are based on risk. With a large down payment and only one major incident on their credit report, you'll probably be near the low end of the interest rate scale at 8%. Smaller down payments and multiple credit problems brings the interest rate up to 12%.

Investors have gotten up to 14% interest for rent to own homes but the risk is to high unless you don't mind going through the foreclosure process to recover rent to own homes. That's where the security comes into play. As the mortgage holder, you are in first position if the buyer defaults. You have to go through the foreclosure process but when you come out the other end, you are able find another buyer, sell above market value, and collect another down payment. The rent to own homes strategy is your ticket to success in today's real estate market.

 

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This blog began as a shot at a little comedy but then I realized it was a good opportunity to help sellers and investors understand how a short sale can become a lease purchase. A short sale presents at least two possible opportunities for a lease purchase. One for the seller and the other for an investor. Actually, for the seller, the lease purchase is an opportunity to avoid a short sale. Let me explain....

The humor in the blog came from a thought that you can learn how long a house has been vacant by looking in the refrigerator. This picture of pizza slices isn't extra cheese. It's petrified cheese from being in a warm fridge for probably 2 years or more. At least that's how long the owner finally divulged.

Now back to our lease purchase lesson.

Lease Purchase When a Short Sale is Slightly Below Market Value

The house I went see about a short sale had been kept up by the owner since it went vacant a couple of years ago. That can make it attractive for a lease purchase because neither the seller nor an investor needs to sink a bunch of money into repairs.

When a seller can't get the lender to approve a short sale they can try a lease purchase. But only if the value of the outstanding loan is close to the current market value or the lease/monthly payment will cover the current monthly loan payment.

I think you see where I'm going with this. A lease purchase it typically for more than market value. Typically about 10% more. So if the house value is within 90% of market value, the seller can use a lease purchase to put a tenant in the house at a monthly payment covering his or her loan payment during the lease phase. When it changes to a seller financed mortgage payment, the monthly payment will still cover the seller's original loan payment. Finally, when the lease purchase balloon payment comes due in a few years, the seller pays off the original loan in full.

There's a possibility this can be done even if the market value is a little less than 90% of the original loan. A lease purchase comes with an above market interest rate. The interest portion of the monthly payment can conceivably make up another few percentage points that the house value is below the outstanding loan.

Investor Version of a Lease Purchase With a Short Sale

The previous example is a creative use of a lease purchase bailing out a seller that can't get approval for a short sale. The investor version of a lease purchase is more common and done more frequently.

It's simply negotiating a short sale for well below market value. This can and is done frequently. The reason is that the short sale costs the lender significantly less than a foreclosure. The lender avoids all of the legal costs. They never take possession of the house so they never have to pay taxes, maintenance, and other associated costs.

There can be a nice profit when an investor buys a short sale and flips it with a lease purchase. Negotiating a below market value short sale and then selling for about 10% above market with a lease purchase can create a nice spread that becomes all profit for the investor. Sweetening the deal is the above market interest rate the investor will collect monthly until the lease purchase balloon payment comes due.

Oh, one more comment about the pizza. When I opened the frig and noticed the power was on and there was a large bottle of Mountain Dew along with the pizza box. I should say the power to the frig was on because there was a light that went on, but the frig was not cold. I did the unthinkable - OPEN THE PIZZA box. What I found was GREEN/YELLOW petrified pizza in there. The funny thing was it was so old it really didn't smell bad anymore. I am still wondering exactly what type of pizza it was originally . I started to laugh and asked if I could take a picture for my blog. The seller thought that I was quite crazy I am sure, but I found it the funniest thing that happened in my day.

Learn to laugh at the small things in life that can keep you going. This business does have some weird things that happen, learn to enjoy them.

 

 

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