"Rent-to-own" as a seller

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hhb
Posts: 58
Joined: Mon Apr 23, 2012 1:14 pm

Fri Oct 12, 2012 12:26 pm

I think there might be some people here with experience, I'd like to open a discussion on this. We're getting everything finished up in our home, and when we're done we'll own everything outright, including the 3.5 acres of land. That means we'll have a whole bunch of equity sitting here doing nothing.

I have renovated a few houses now, and now this mini home which was my first foray into the mobile/mini home stuff. My thought was that I can possibly pick up another mobile/mini around here cheaply, reno it, and sell it... but of course the market for lower end homes includes those with marginal credit. I have seen "rent-to-own" deals advertised before, and I know I was approached on each house I had about it, seems there's lots of people eager to buy a home but need "alternative" financing. Because of the lower amounts that mobiles go for, I figured that was a good market for it.

Is anyone here into that business? I know there are all kinds of different variations on it, but it seems like it goes something like this: home is sold for a premium price given what it is, there is a large (non-refundable) down payment required, the interest rate is generally high and the term is short, like 5 years. Either the "buyer" (actually a tenant) pays it off and gets the home for $1 at the end of the term, or they don't and the home gets repossessed and the cycle starts all over again.

Doing the math:

[*]Buy home for $7000 cash
[*]Spend $3000 fixing it up, total investment $10,000
[*]"Sell" for $20,000
[*]Collect $2000 deposit / down payment
[*]"Finance" $18000 as $500 a month for 5 years (around 22% interest rate)
[*]Tenant pays lot fee and all utilities, maintenance and upkeep because they're "buying" it.
[*]Possibly also require legal fees for financing to be paid by buyer too

The catch on the financing is that there is no "equity" build up for the client, they own 0% until it's paid in full, thus the "rent-to-own" term.

So assuming I borrow the initial $10,000 at 8%, my monthly payments are around $200, so my positive cash flow is $300 a month plus $2000 up front. Because they are "buying" as opposed to renting, theoretically they should be better tenants in that they might look after the place a bit better and stay longer, plus they maintain it, not me (hopefully). Any default in payment means they get kicked out of course, written in the contract, and the cycle starts over.

Does the above sound about right? I can see advantages over just straight out renting. Sure, you don't have a home to collect rent from at the end of 5 years possibly, but after 5 years of rental any older mobile would probably be in need of that much in repairs anyway I would think. I'd love some feedback on this.


DCDiva
Posts: 191
Joined: Mon Oct 19, 2009 10:16 pm

Sun Oct 21, 2012 6:40 pm

It would work but get a iron clad contract looked over by a lawyer. I have done a few land contracts and make sure you add about in case of death and divorce. I had the person I was buying a house from died and I had that this contract stay valid so her family could not contest anything. And in divorce or split up of a couple they do not own the MH until the end and have no equality to split but I can see issues but a great contract will cover it all. Plus you might want to have a clause they can not move the MH. You may never find it to evict if the stop paying. Insurance make sure you are on there as owner and that they have good coverage. If possible I would put the mh on my property and get the lot rent too.
Melissa

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Greg S
Posts: 541
Joined: Wed Jun 18, 2008 10:13 am
Location: Kingston Ontario Canada

Mon Nov 12, 2012 11:35 pm

You sort of have the idea but not totally. The sale price is set at a premium but usually on the estimated value at time of termination of sale. Generally assumed the home will appreciate over time and therefor the purchase price would be inflated to it's future value. Problem with this theory using mobile homes is that a mobile is a depreciating asset not appreciating. As it ages it depreciates not appreciates. This could cause you issues in finding buyers.
Secondly in a rent to own the monthly fee includes a portion that goes toward paying down the principal. Paying down the principal in a rent to own arrangement is the attraction for the buyer. At the end of the agreement they have in theory built up equity through both the initial down payment and the monthly principal payments.
The actual purpose of the rent to own is to build up the credit rating of the rent to own client so that at the end of the term they can qualify for financing the remainder of the mortgage. Based on the type of client you would be attracting and the fact that you are dealing with a mobile home the chance of your client every qualifying for a real loan is somewhere in the range slightly less than zero.
The rent to own system should be designed to succeed not be designed to fail so probably not the best scenario for mobiles. You would be much better off simply setting it up as a straight sale where you hold the mortgage. Then if they default you take it back but in the interim you do not have the hassle of being a landlord.

If you do go the rent to own route remember to protect yourself you must have two separate contracts. One representing the tenant/landlord contract and the other for the purchase agreement. Otherwise you will never be able to evict if they default on their payments. Hire a lawyer experienced with rent to own to draw up the agreements otherwise you stand to lose your shirt. Also you are responsible for carrying the insurance coverage on the home while it is rent to own. Your tenant will only be able to get contents insurance but even if they do get home and liability you risk having them default or cancel the coverage.

My advice forget the complicated rent to own and simply sell the house and hold the mortgage. Generally you can get 12 to 15% interest depending on the prevailing loan rates keeping in mind you clients are the worst possible credit risks and quality wise may not have the highest respect for the property. If you repo you may end up having to do another reno to resell.
An individual must enforce his own meaning in life and rise above the perceived conformity of the masses. (Anton LaVey)

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