I know this topic has been discussed here before, however, I think it needs further discussion. In regards to the FSBO house I for sale now, I have had 2 calls asking me if I would consider Rent to Own. When I asked if they could put 10% down ($6,500.00) , the conversation ended right then. I do know that many LL's in my town will do Rent to Own or a Lease/Option with practically nothing down from the tenant.

But my question is: why would any investor or LL agree to a RTO or Lease Option deal when the tenant/buyer has little or no skin in the game? There has to be some benefit to the property owner that would justify his or her decision to a RTO or L/O type deal. What is it?

I tell other investors here in California that it is "Illegal" to evict a "Co-owner". So when your RTO tenant pays an "Extra" amount towards the ownership/down payment, in fact they are a co-owner by contract.

I don't know what the benefit is specifically, but I can speculate. Every person I've talked to who actually does RTOs has some combination of the following:

1) Big chunk of $ down.

2) Over market rent. + $100-$200/month is common.

3) Reduce/eliminate the amount of maintenance for which the land lord is responsible.

They may not do #1, but do 2 & 3 which increases their monthly cash flow and keeps the risk minimal by having only a lease they can use to evict vs. foreclosing. Some states say that once $X in equity is obtain, regardless of what the contract says, the tenant must be foreclosed on. By not taking #1, the owner doesn't risk the tenant/buyer gaining sizable equity.

Sid,

I would consider an Owner-Finance deal if someone could put down 20%,...here they get the Deed in their name too.

I would consider a Lease-Option with 10% down but no less. They have to have a min of 10% skin in the game before I would consider this.

RTO with nothing down,...no way. Why even bother? Plus, even if I trade 'no maintenance calls' instead of a cash down payment,...do you really think the tenant is going to do their own maintenance when the HVAC or plumbing quits working? They are going to leave in the middle of the night. Again, why do LL's do these deals?

"do you really think the tenant is going to do their own maintenance when the HVAC or plumbing quits working?"

No, which is one reason I don't do these kinds of deals. Plus--you know this about me but to be clear for others--I haven't been able to justify in my charging above market rent (strategy 2 above) and pushing off maintenance responsibility (strategy 3 above) in a scenario that has the abysmal failure rate of RTOs/LOs....95%. For me, to equal value in play, there should be roughly as good a chance for the Seller as the Buyer each to get what they want.

To boil it all down:

The Seller almost ALWAYS gets what they want in RTO/LO: a much higher sale price + higher rent + much less responsibility + a very high probability they get to do the whole thing all over again multiple times. I have spoken to several Sellers who do these kinds of deal and they say, in clear terms, they WANT the Buyer to fail. 6, 7, 8 times? The more the merrier, they say. There simply is no desire to truly 'sell'.

The Buyer almost NEVER gets what they want: a home. They get an overpriced rental for a brief period.

If results were better--maybe at least 50% success rate--then I would see it as a fair value exchange for non-traditional home buyers. Since the results are so heavily skewed against the would-be "owner" ever actually ending up with the home, I can't do it in good conscience.

To be over abundantly clear, I do know a FEW RTO/LO sellers who have a better than 5% rate of owners who buy. Their results are more like 30-60% of buyers completing the deal and getting a home. That seems arguably fair. My hat is off to them. So it can be done ethically and profitably.

But the way these have been described to me most times do not have that good of a track record.

Explain this. Why would you want your buyer to not make the rent or mortgage payment each month on your REO?

They are not going keep your house up with

this mine set.You like cleaning an fixing up your house to put it back on the market and put another loser in? This does not

Sid,

With a 95% default rate and this is what the seller's pray for,...can we conclude RTO is nothing but a LL scam to fleece naive tenants out of their last nickle?

Rent TO OWN; They are a renter that is paying let's say 650 to rent the house with the POSSIBILITY they will some day finance it to be able to make the mortgage possible.

The $650 is not ALL going toward the purchase side of the equation. Let's say for argument sake there is $250 going to the purchase side of it. AND IF they are there for two years there is $6,000 paid toward closing costs. So after two years with the purchase price of $65,000 they now must get a mortgage for 59,000.

HOWEVER what happens when they go south in that two year period. Late payments or no payments. And RobertJ mentioned what kind of interest do they have in the house according to ALABAMA LAW.

Depending on the structure of the RENT to Own agreement. The problem is they do not have the $6,500 up front so they are paying the rent with part of it going to the down payment. Then at the 2 year point they get a mortgage on the property. If they were good with payments plus upkeep of the unit.

The other factor is what is their affordability factor can their income afford to buy the place after the 2 year period. The figure of $650 are they making at least $1,950 monthly to afford the place and IF a hiccup hits their finances they are GONE...

If they are GONE what legal document is activated to remove them from any interest in the property. A Quit Claim Deed that is signed at the time of the Rent to Own agreement or is it the long drawn out process of an eviction? With the Quit Claim Deed they are releasing whatever ownership they had in the property via the rent to own agreement. BUT the Quit Claim Deed is held by a neutral 3rd party as the go to document to remove them quickly from the property if they go south with monthly rent to own payments. BUT now they have to be evicted due to holdover or squatter whatever they are called at this point. AND how much damage have they created. OK so you did a monthly inspection of the unit BUT they are now being evicted from the place. Are they going to move quietly or take it out on the unit???

YEP Roy it's a risk but up the rent to over the market for the rent to own and find the best Real Estate Attorney in your area to help write a hard clad rent to own agreement with in the Alabama Law that you can work it if they go very wrong on you. Then they become a HOUSE BEATER!!!

I know it may be over the top with the HOUSE BEATER factor BUT you don't have the crystal ball to tell how they will be financially responsible or NOT???

Unfortunately this may be the go to remedy to get a buyer for the property.

Roy send fliers to the employers in your area to the attention of the human resource dept. There may be a new employee that is looking for a place to live.

The two callers my be testing the waters to find out IF you may be open to a rent to own. It does not hurt from them to ask. Plus you IMMEDIATELY screened them out quickly with the $6,500. down payment.

There are some landlord/investors that sell the monthly payment as the carrot to get a buyer. I think it was Ken of NY who said that many buyers in this price range don't care much nor do they understand the legal documents such as a purchase agreement. It's true they will and can walk away from it at any time and never blink an eye. Case in point the 2008 subprime lending factor there were 1000 up 1000 of people walk away from their mortgages. Now some went away peacefully and other were house beaters.

Higher Risk will make you more money however you may have to wait to get your money over time just not immediately.

Ken,

When you get the fixer-upper house back, is it in better or worse shape than when you first handed over the keys?

Ken,

Ken, you need to run a seminar or roundtable on this. I don't think this would work in my area because you won't find houses that cheap. Are you in upstate NY?

All my places can be rent to own, they pay rent until they buy the house. If they want to pay an option fee, my state laws are they must purchase with their own financing on or before the 23 month, or the option fee is lost at my discretion, end of our relationship comes very fast when they learn they can't get financed - that is the object of that 23 months, get a bank loan or have aunt Sally ready to pay the previously agreed purchase price, what often happens is they get angry, damage much of the house while moving out and if it goes to court I show the repair bills for all this damage, judge awards nothing and when I leave that hearing I go upstairs while they go somewhere on the sidewalk.

Roy...

"With a 95% default rate and this is what the seller's pray for,...can we conclude RTO is nothing but a LL scam to fleece naive tenants out of their last nickle?"

In the beginning, I felt that way, but as time has gone on I believe it is more nuanced than that. The devil is in the details of each individual deal, and where I find the answer is in the motives of the Buyer and the Seller.

A Buyer wants to a Buy a house.

A Seller wants to Sell a house.

Pretty simple....

As mentioned in my most recent follow up, there are some RTO sellers who have a success rate between 30-60%. I think those can be deemed legitimate intention of a Seller to actually sell.

The failure rate of some RTO Sellers it what makes them a NO-GO for me. When Sellers tell me their goal is to have multiple Buyers fail, that tells me they they do not have any interest in actually selling. If they truly wanted to sell, the deals would be better structured to give the Buyers at least even odds of success. That's where it breaks down for me. I think they misuse the word "Sell".

To put it another way, let's pretend the 5% RTO sellers would sit down with their buyers and say, "Look Joe, I know you want to RTO this house from me, but I've got to tell you that based on my past experience only 5% of people ever complete these deals. The rest just pay me additional rent for 2 years, lose their option fee, then go back to renting."

How many RTO sellers would do that? How many Buyers would still sign up after hearing that? I dunno. I doubt this happens often, if ever. Maybe someone will chime in and say otherwise.

We discussed here once how Sellers could help structure a legit RTO. One solution was offering financial coaching and counseling to help the RTO buyer improve their credit so they could qualify to cash the Seller out at the end of the 2 year L/O. I was/am on board with that plan.

Ultimately, when a person becomes an adult, they have to learn to look out for themselves, so I don't sign off on the whole "The Gub'mint has to protect you from scams." Basic intelligence should protect you...and if not, then getting burned by a bad deal ONCE should be enough to teach you not to do it again. So worst case scenario, a person who does an RTO and fails should be smart enough never to do that again: the $5,000 fee or whatever they lose in the deal is the price of their 'education'.... By way of comparison, I paid 4x that amount for my education.

The only difference, in the end, is how well each of us use the information we pay for.

Hope that helps clarify where I stand on the issue.

Ken, as I see it, you're basically in a business that's a combination of real estate arbitrage and rental. The nice thing about the rental part is that you carry no expenses and there's little tenant vetting; the two main issues in the rental business.

If the person has very little skin in the game, then you need to create it if you feel they would have a fighting chance to make it happen.

I have offered money towards a sellers assist for every month in which rent is paid on time and that there are no service calls at that address.

If they don't have the required $5,000, then I will give them a two year lease. If they have a two year on time payment history, I am willing to offer this family a lease option for only $3,800. The family still needs to have some money to put down.

My conversion rate on an annual basis is low, however....just because someone has an expired option and wants to buy the place the following year, I am not one of those folks who require an annual payment to keep the option renewed. So where measured annually, it is disappointing, about 35-45% of all my residents end up being owners at one of my places.