What Are the Risks in Rent-to-Own Real Estate Investing?
Real estate investors who work with rent-to-own properties and lease purchase options are likely to run into snags here and there because, like any investment, there is inherent risk. Minimizing these risks is essential to success.
Rent-to-own property investments and lease purchase options have inherent risk factors that cannot be removed. These, as with risk factors involved in any type of investment scenario, are just the nature of the beast. However, in order for a real estate investor to be able to profit from such a venture, these risk factors must be acknowledged and addressed to minimize potential loss. What are the general risk factors in rent-to-own and lease purchase options?
Consider that the tenant-buyers with whom you will be working are those with whom standard mortgage companies and banks are unwilling to work. This is usually due to insufficient credit, lack of steady work, high debt to income ratio, and other factors that are considered high-risk for a mortgage loan. This means that you are automatically signing up to accept a form of credit – through a contract – with someone that is not able to receive formal credit approval elsewhere. This is one of the risk factors that must be taken into consideration.
There is a chance that your tenant-buyer will not continue payments as agreed in the lease purchase contract. You may find that, at the end of the contract, your tenant has decided not to purchase the property, at which point you again have a property on your hands to sell. Perhaps it turns out that, once the tenant-buyer is in the home, he or she leaves it in a state of disrepair that is unacceptable and refuses to pay to repair it. That means you now have a property that is not only in your hands awaiting a new tenant but also must be repaired before being rented out again.
In order to minimize these risks, you need to have all aspects covered in the initial contract. Be sure you make it clear that the tenant-buyer is responsible for regular maintenance of the property and that it is to kept in acceptable condition. Cover the monthly payments in terms of amount, terms of the lease (how long payments must be maintained), and consequences of nonpayment. Have a lawyer attend to the documentation so that everything is legally binding, and make sure all parties have signed and dated copies of the agreement. Make sure you have a copy filed with the county as well so that the entire agreement is on record and there are no disputes as to what the original agreement was. This will also cover you in the event that the tenant-buyer wants to reduce the offer on the amount for which the house was to be purchased.
Be prepared to take over your leased property if the tenant-buyer decides not to make the purchase so that you are not surprised or negatively affected if they simply move out. It may be their choice, or they may still have insufficient credit to qualify for the mortgage loan they need. Make sure you have the means of advertisement to get the real estate property back out on the market quickly so you can find another tenant; there are always those who are looking for this kind of alternative buying method.
Most of all, keep track of the paperwork and make everything legally binding. You cannot remove the risk factors from rent-to-own housing options, but you can reduce the amount of risk by taking the necessary precautions.
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[…] Charles W. Moore wrote an interesting post today on What Are the Risks in Rent-to-Own Real Estate Investing?Here’s a quick excerptReal estate investors who work with rent-to-own properties and lease purchase options are likely to run into snags here and there because, like any investment, there is inherent risk. Minimizing these risks is essential to success. … […]
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