Q: I’d like some information about how to sell our townhouse to the current tenants. We would hold the mortgage. Have you written an article in the past on this subject? Can you recommend a good book? Thank you.
A: I have written extensively on how to sell your property to tenants, or even do a lease-with-an-option to buy. You can find these articles at ThinkGlink.com/rent-to-own.
Rent-to-own, also known as lease-with-an-option to buy, can be a- – way for homeowners to home-grow future home buyers. You can structure the deal so that the tenant pays you a one-time option fee in addition to the monthly rent.
The option fee gives the tenant the right to purchase the property at a pre-determined price within a year. If the purchase doesn’t happen, the tenant can renew the option by paying another fee, plus his or her rent. You would want to make it clear that the option fee is non-refundable if the tenant fails to buy the property.
You can also structure the deal so that a portion of the rent paid is credited toward the buyers as a down payment. This is a very attractive feature for some buyers who are trying to save up for a down payment.
If you go down the path of the rent-to-own option and your tenant is ready to buy your property, you should hire a real estate attorney to get a contract together, inform you of what you need to do in terms of required seller disclosures, help arrange for title, negotiate the contract and make sure you’re protected.
If you are already at the point that the tenant wants to buy the property from you but needs assistance from you in the form of a second mortgage, you’ll also want to run credit and background checks on the buyers and make sure you know exactly how much money they’ll have on hand to make the payments.
You will also need to assess the risk you take in handing over the title of the home to the buyer before you have received payment in full.
Should you hold the paper? It’s very risky. You’d be better off having your buyers get a regular mortgage, if they can qualify for one.
But if your buyers don’t qualify for a loan from a conventional lender, you’ll need to decide whether you want to bear the risk of having to foreclose on the buyers to get the title back and then resell the property again. And if they do qualify for a conventional mortgage but need some additional funds to close, you’ll need to make sure that they still qualify for the conventional mortgage if you give them additional financing.
If you do give them some of the financing, you run the risk that you may lose entirely the amount they financed. As you may have read recently, many banks are finding that the second mortgages granted to borrowers are virtually worthless when the property falls in value. If the borrower defaults on the primary mortgage, the primary lender forecloses on the property and generally wipes the second loan out.
One other option available is to sell the property in installments. You would still hold the title to the property but your buyer would pay you over time. The buyer would be unable to get new financing or make changes on the title to the property without your consent, but you would have to wait for your buyer to finally come up with all of the money to transfer the title to him or her.
Even this situation carries risks and you are well advised to talk to a real estate attorney about any decision you make.
You need to make sure you’re protected all the way around.