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Real Estate Seller’s Market Slow? Rent-To-Own Is the Solution! By Jack Sternberg The market is slow in your area…oh, so slow! And you have a property just sitting there gathering dust, not income! So, what’s to be done? Rent-to-own, that’s what! What Is the Rent-To-Own Strategy? Simply put, it’s a process whereby you lease your property to a buyer for a stated period of time while giving them an option to buy the house at the end of that period. It’s also known as the “lease with option to buy” strategy. What’s Involved? Once you approve renters, you provide them with two agreements. One is the standard rental agreement (or lease agreement). The other is an option agreement, which is the buyer’s right to buy the property. You’ll require the buyer to provide upfront money (“option money” which typically is 3 to 5% of the home’s purchase price, depending on the area). This secures their option to buy the house at a later date. Advantages for You, As the Seller As the provider of the lease option, you’ll receive many advantages, but here are three great ones to whet your appetite for this strategy: • Immediate cash flow—you’re getting income from a property that was producing none. • Higher monthly rent—you can charge buyers more for the privilege of a great house and an option to buy. • Save money and hassle--tenants may be made responsible for basic maintenance and repair tasks so you don’t have to bother with such items. Disadvantages for You, As the Seller Every real estate deal has its disadvantages as well as advantages, and you should be aware of them: • Cash sale dependent upon exercise of option--you don’t get a cash sale until the buyers exercise the option. But, remember, you’ve got rent money coming in during the period of the lease! • Potential hassle—if you don’t qualify the buyers carefully, there’s always the possibility they may prove troublesome tenants in terms of rent payment and/or house upkeep. Advantages for the Buyer Home buyers also get several advantages from the rent-to-own arrangement, but here are three that will tempt people to take up your offer: • Less cash required—compared to conventional financing, the lease-option has a much lower up-front cash requirement. • Try-out period--Buyers can try out the house before buying to see if they really like it, and it meets their needs. • Ease and convenience--buyers can move in within a day or two of signing the lease agreement. There are none of the complications associated with conventional real estate deals. Disadvantages for the Buyer The rent-to-own method has the following disadvantages for buyers: • Lack of tax deductions. • Higher monthly rent. How Long Before a Buyer Exercises an Option to Buy? On average, a buyer occupies a home for three years before deciding to buy or move on. Do You Need a Lawyer to Help Out with the Process? Yes, unless you’re very experienced and knowledgeable about lease options. Be sure to choose a lawyer who specializes in real estate, not one who’s a “general practitioner.” Think of the fee you pay the lawyer as headache prevention medicine! How Do I Advertise a Rent-To-Own Property? Advertising a rent-to-own property is a simple process. All you need to do is run an ad under “Homes for Rent” or similar section in the local and/or neighborhood newspaper(s). Don’t forget the Internet, either! There are local and national services available specifically designed for the rent-to-own market. What Mistakes Should I Avoid? If you’re not experienced in this field, don’t attempt a “do-it-yourself” or “one size fits all” lease agreement. You’ll just be setting yourself up for trouble. As I stated earlier, find a lawyer who specializes in real estate. A second mistake is to not negotiate with the buyers for the price they’ll pay once they decide to exercise the option. Most likely, you’ll want them to pay the market price. After all, it’s likely the house will appreciate and why shouldn’t you benefit from that appreciation? Of course, the buyers will want to lock in the price at the time they sign the agreement to avoid paying more. So, don’t forget to hone your negotiation skills! My Last Words of Advice If the market is slow in your area, don’t wait... do it now!
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