Has anyone here done a successful Rent to Own deal with a tenant that has rented from you for the last 2 years? In this context, successful means this tenant fulfilled their end of the new RTO agreement and in the end took title to the house?

I have a 2 year tenant who has paid $700.00/month for the last 2 years and they have applied for a FHA mortgage to buy to the house but for whatever reasons, they can't come up with the necessary funds ($3,500.00) to go to the closing table. Their current lease comes up for renewal at the end of August and I am thinking about offering them a RTO deal (not owner finance,...just a simple 'nothing down' RTO deal).

I haven't, but several on this board have. How you structure the deal varies, but here's the common theme I've heard from folks who do them.

1) Down payment/option money. Somewhere between $1000 - $20,000 depending on the cost of the home. Seems like usually around 3-5% of the agreed on purchase price. RTO tenant loses this amount if they don't complete the deal. No refunds, regardless of "the reason." Do or die money.

2) Short term. 2 years max, but some offer an option to renew for $X more down payment/option money. The reason is simple: you make your most money off the down payment/option money, so you want to churn and burn that as often and as fast as possible.

3) Most or all maintenance becomes the RTO tenant's responsibility, essentially removing you from the day to day and limiting your expenses. Careful here, though...this often leads to deferred maintenance. Everyone claims he "can fix most stuff" but few can, or they do some weird Frankenstein's monster fix. You remember those cheap $5000 "Roy houses" and how terrible they were? Probably unsuccessful RTOs.

4) Above market purchase price. This may be harder to ascertain these days. A few years ago, though, let's say a house that would sell for $75,000 on MLS would be marked up to $100,000 for the RTO deal. Today you'd have to be careful though since home prices continue to set records even though the market is slowing down a bit.

5) Two contracts: one is a rental; one is a purchase agreement. Keep them separate. Do not reference the lease in the purchase agreement, and do not reference the purchase agreement in the lease. Your goal is to be able to evict them like normal tenants if they fail and refuse to move out. Talk to a skilled attorney in your area to ensure you do not create "equitable interest" in the property.

6) That said, somehow you end up crediting a portion of their monthly "rent" (They pay rent, they are tenants, this is a RENT to own) toward the purchase price. This is where it gets sticky and tricky. Get professional help doing this in YOUR area, because your judge might not feel the same as Billy Bob's judge in PA. Local knowledge triumphs over internet "experts" most times.

That's about it.

Keep in mind, the most successful RTO folks generally count on repo-ing the house at least 7-8 times. To give the tenant a reasonable chance at success, they need to have ongoing financial counseling and accountability, and they should be screened to a higher standard than a typical tenant. Most folks will not or can not "clean up their credit" enough in 2 years to qualify for bank financing, which is how they'll close out their deal with you. Lifetime of bad money habits aren't easy to break. Stuff will come up. "Emergencies" (i.e. concert tickets!) will happen. 2 years seems like forever to them. They'll clean up their credit "next month"....which they say to themselves 23 times, then behold! It's time to get bank financing and they can't.

I don't do RTOs. Generally speaking, I believe they are a tool that prey on people with bad money habits by selling them the dream of homeownership, but that's all it is: a dream. No bank in their right mind would lend them a dollar, and the RTO deals basically says you'll be their bank for 2 years on a high risk, high rate, inflated loan balance with a short term balloon which you're 99% sure they will fail to complete successfully.

Not my cup of cocoa.

To help them achieve success, I'd look for a minimum 680 credit score, $5,000 savings set aside in the bank AFTER they pay you the RTO fee, and no less than 2 years of stable employment history.

Any guesses how many "tenants" like that you'll find? If they are that good, they'll go to a bank where it's cheaper than doing an RTO.

How bout an Alabamer Land Contract.

On a FHA deal you can provide a sellers assist up to 6% of the sales price. The buyer will still need o provide the 3.5% down payment in order to make the deal work. So why give a 6% assist? Well if you were selling via a realtor, how much would you be paying them?

A good mortgage broker can be invaluable in making these nuts and bolts work.

I routinely let a strong candidate know that after signing a two year lease, and having one year of successful payments via Clear Now (which reports to the credit bureaus) - that they can start working with my mortgage broker if they want. Why do that? I am getting two leases with folks that are inspired to pay on time and are willing to get trained in the home ownership path. These folks tend to take better care of a place than others do.

Additionally I typically target specific areas when I am a buyer and I have various units in these neighborhoods. I can control the comps that I have in buying and selling.

So how often does this pipeline work out shifting an applicant to tenant on to a RTO customer and then an owner? Well the jump from RTO to owner occurs about 25% of the time, so don't expect that just because someone has an option to buy for a year that they will buying during that time. That 25% figure is of all people in the pipeline.

Please, please please - try and be as fair as possible if someone drops out of the program. If you ever have to go to the judge - you are viewed as the expert taking advantage of the innocent unknowing tenant buyer. I find it is absolutely best to have an option agreement with a different start and end date than your lease. Don't co-mingle the words buyer and tenant.

I don't use Sid's 680 number....typically those folks would be going straight to a banker. He is absolutely correct that there are folks out there that have revolving doors on rentals where they make option money an income stream. This is especially true in the lower end units. I find that if you have a place that would be a typical first time home buyer place - then they are the best ones to offer RTO. So please - don't try to do these with any war zones and expect owner occupants to want to live there. Perhaps another investor would be a better idea.

Sid said,..'You remember those cheap $5000 "Roy houses" and how terrible they were?'

Back in 2010, I bought this house from my insurance company for $5,000.00 and yes, it was mess then. I had to completely re-wire and replumb this entire house after the former owner made a horrible attempt at replumbing and rewiring the house.

Roy, if you don't want this house any more, I'd recommend just selling it to an investors. I get it that you want to "help" and that's nice of you. But this deal has maybe a 20% chance of success, and if it fails you're going to break a lot of hopes and dreams. You'll get paid well for it, of course, but I don't think that's the business model you want to go for.

What's keeping this couple from just doing a straight, conventional mortgage: Down payment too high? Credit too poor? Details!

There are banks offering conventional mortgages (with PMI) with as little as 5% down. On a $75,000 house, that's only $3,750, which is probably less than the RTO/option fee you or any other seller would require.

For more info:

better.com/content/understanding-your-conventional-loan-down-payment/

Don't hold paper for people who can't afford top buy the house.

I sold with a FHA buyer who wanted me to pay all the closing costs so what we did was to add all the costs to the price of the house and when escrow was done, they had the house, closing costs were paid and I got 100% of my money that I would have gotten with a different buyer.

Ken,

In some States, Like California, you can not evict a co-owner. So with a Rent To Own contract where a tenant pays a monthly premium above the rent as a payment towards ownership, then they are an owner by contract and can not be evicted if they refuse to pay rent! So an attorney has to get the RTO contract voided, (sometimes refund the monthly premium) then proceed with an eviction.

Roy, they have backed out on the deal.

They have been approved for a mortgage, and now they want to leave your crummy house in a crummy neighborhood.

Hypoethical RTO deal that I just dreamed up. No interest and No down payment here.

Current rent is $750.00/month.

$750.00 x 96 months (8 years) = $72,000. Make all 96 rent payments and the title will be transferred to the tenant buyer. Each year, a 2% rent increase will be added to offset property tax and insurance cost increases.

Now, in exchange for no 20% down payment here, all maintenance costs will be paid for by the tenant/buyer here.

Would anyone here accept this RTO deal? It appears to be win/win for both the LL/seller and the tenant/buyer. Again, I just dreamed this up for the sake of simplicity.

Ken,

I would make this deal because I would not want my tenant to have any equitable interest in the house until all 96 rent payments have been made. There is no interest or down payment here because from a legal standpoint, that would imply that I was owner-financing the house to them, which I am not.

What I get is 8 more years of rent payments but with the understanding that if the Heat Pump compressor dies or the roof starts leaking, that is there problem and not mine. Plus, they have lived there for 2 years already and they know that house better than I do! And after any length of time, if they are stupid enough to walk away from this no money down opportunity,.. no big deal, I will just make the same deal to the next tenant that comes along. This is a 1,200 sq. ft. 3/2/2 house and I have never had a problem finding tenants to rent this house.

Jasper - with another investor, I would do traditional owner-financing with approx. 30% down.

We did it, added enough to price we paid to allow for his down payment. Contract for deed. He pays insurance and taxes. I believe we did 6% for 15 years, he's over 1/2 way through!

Your tenants walking away is not the worst thing that could happen. They might stop paying and dig in. By structuring the deal the way you describe, I think you are still giving them equitable interest in the property. You could not evict, you would have to foreclose.

Roy...old buddy... Old pal... What kind of weed are you smoking?

People are irresponsible... Not signing paper.

You think they're going to have the resources and motivation to fix the heat pump when it goes out, or anything else for that matter?

Do this deal, and I predict in 24 months we're going to see a post titled, "How a deal turned a $75,000 house into a $25,000 house."

Sid,

I have not smoked any of those funny looking cigs since I was in high school listening to Barry Manilow on my 8-track tapes,..LOL. Oh, those were the days! I drink Coors instead, it is legal here and I don't have to meet shady people in a dark alley to buy it.

My hypothetical RTO deal here, assuming it ever made it to a paper contract, would be structured very similar to a Lease/Option. Here the lease portion would be for 8 years or 96 months. At any time, if the tenant wants to exercise the Option to Buy, they can do so and pay-off the balance in a lump sum by whatever means they have at the time.

And if the Heat Pump dies, they can either fix it or go buy some window units or space heaters depending on the season. ,...just don't bother me with it. This would be my way of training them to act like a homeowner does and not a tenant.

Roy,

I really admire you for trying to help this person. Maybe I'm too cynical because I had an RTO blow up in my face. In my case, the guy was a good tenant until he wasn't. He lost his job, so he squatted for a few months until he used up his down payment. I tried to evict, but the judge threw it out because I was required to foreclose. Judge said I was "in the wrong court".

Yep, still a Coors man myself when the thirst hits just right. This stupidly hot weather has made light, crisp beverages a delight!

Simplicity is great. On paper yes it is incredibly simple. But, you leave out the "fairness" gene and the human element that goes into deals like these. A tenant/buyer who pays for 4-5 years and then the SHTF is not going to walk away happily owning his actions that lead to the loss of "his" house.

2 years of history with this tenant is decent. And yet I've had 3+ year tenants go bad, and when they do, I'm the one they blame. My fault I won't "work with them"... my fault that they agreed to X and now don't want to do X any more. Etc. You know the drill. Find a scapegoat. The greedy LL/property owner is an easy target. Time to punch holes in walls and doors.

YMMV. Go forth and conquer! If this one works out, I'll buy you a keg of Coors (or enough 12 packs to make up the difference if you don't have a kegerator).

In Pennsylvania, anything you do, no matter how you word it or structure it, with an implication of owning the property at the end of some term creates an equity interest and you are foreclosing, not evicting.

And if they can't come up with $3500 now, how will they have monies for a major hvac, foundation, plumbing, etc., issue? If they can't, it will fall back on you should they default.

Sid,

This situation is falling apart at the seams. They now want to move out at the end of August when their lease ends. They have chosen not to buy the house via my mortgage broker and based on what you have said, I will refrain from offering them my special once in a lifetime RTO deal. Besides, I really would like to sell this D-hood house on the MLS and be done with it. I have 2 houses in D hoods and I would like to sell both of them, even though they are phenomenal cash cows.

Roy,

You mean these tenants are flakes? Say it aint so! (*grins)

This is one reason I don't do RTO, among others. Generally speaking, RTO has some very limited circumstances in which it works out, but most times it involves poorly qualified "Buyers" who don't pay bills on time, have bad employment track records, and are so shaky financially their own mom won't lend them a dime.

There are a few RTO Sellers who do it well, and their Buyers often end up completing the deal. Bravo to them!