There are no less than three things you MUST know.

#1. You should want to avoid jail time. Be certain to understand how the control interest component of 'rent to own' is addressed.

#2. As a form if 'financing' a house 'rent to own' can fall under the Consumer Protection Act. Proceed with great caution. The seller can be damaged significantly.

#3. The profit is made the day the down payment is received. That is how and when you must be paid....not at some time in the future when it is certain no sale will occur. (that means you did all that work for NOTHING)

You must get paid FIRST. Who pays you depends on your structure.

This is highly complex with unimaginable variables determined by the instrument of ownership, needs of seller, business architecture, and let's not forget the situation of the buyer. You need to have your brokers attorney read the contract and give it the green light. One such seller contained in the first line of the contract, "I intend to make an unconscionable amount of money...."  and folks still signed on the dotted line.

Be aware, Rent to own and Lease/option is BANNED in many states as it pertains to residential sales. There is a reason for that.

Hi Jillian La Rocque !

Raymond E. Camp gave you the nuts and bolts of the "rent to own" and I agree with his answer completely.

I would just like to say that rent to own deals should be included in your business. They are not for everyone and sometimes hard to find in certain markets but they can be an viable option for the right customer.

Here's what you definitely want to do: make sure the buyer has spoken to a lender and is on a path to repairing their credit or resolving whatever it is they need to do so they can purchase the property in the time frame agreed to. You should also make sure that the buyer signs a particular disclosure that lets them know that if they do not complete the loan process then they would lose their deposit. I advise having this type of deal drawn up by a lawyer. (this is where agents sometimes drop the ball)

Here are examples of good properties that could be considered for a rent to own. 

1. property location is not so appealing.

2. the market is slow.

3. solid buyer that needs a little time to solve credit issues. For example, they have a home that they need to sell but need to relocate right away - or the buyer has to pay off a loan or credit card prior to qualifying for a mortgage - or other credit issues that needs resolved withen the time frame agreed.

I hope this helps you and good luck!

This is where the poor Schmuck, a/k/a lessee, puts down a big ol' wad of money that the Shark, a/k/a lessor, pockets and immediately blows on a big ol' wad of cocaine, for the opportunity to move into a $hithole and later buy at an exorbitant price at which it will not appraise, but does not matter because Schmuck won't have the credit to buy it anyway.

I'm not a fan. Too often the buyer "intends" to get their credit in shape by the time the purchase option comes do, but they don't.  Due to the typically higher, non refundable deposit and over market rent, they end up worse off than if they hadn't done one.  The choices available to a buyer pursuing these is very limited and it commonly the seller who is overpriced. 

The buyer has an illusion of ownership, but is nothing more than a renter paying too much.  

They can work out, but I suspect the vast majority don't.  For the landlord/Seller it can be a windfall, but it's very one sided most of the time. 

Rent to own is usually used when the prospective home buyers are unable to currently qualify for mortgage financing but think they will qualify at a future date. Sadly, there are many sellers that take advantage buyers with these schemes.

Hi Jillian La Rocque .  The simple answer is a "rent-to-own or "lease/purchase" is really a sale with a delayed closing.  I did quite a few of them during my active days.   I was the local expert on this type of transaction.  

There are many good reasons and advantages (for the seller mostly) to a rent-to-own.,, and some precautions.

As for the other questions, I'd be happy to communicate with you direct through email.  

There is a name for those who want 'rent-to-own' - RENTERS. The seller is tied up, and the buyer has yet to qualify and either won't, or if they do, they will decide they're over that house, and after they have destroyed it, they will buy another house.
Does it sound like I have lived this? I have. A 'buyer' who had to finally be evicted after 1 year of 'rent to own' that was supposed to be 6 months. He could not qualify, would not leave, was a holdover tenant and someone else was contracted to buy the house. He locked out the appraiser 3x (trip charges!). He opened the doors to the neighborhood and told everyone come in and take whatever you want. And he left messes too gross to mention in mixed company. He was a cop, by the way.

Jillian La Rocque Rent-to-own is nothing more than an option to purchase at a later date. Usually the tenant agrees to pay an additional amount of rent to exercise the option at a pre determined date in the future. With this arrangement you should get paid on the rental agreement and the sale if the option is exercised and closes. With an option, the tenant does not have to go through with the sale.

A lease purchase is a written offer to purchase at a later date. The buyer cannot cancel the offer and must go through with the deal short of any contingencies. You probably won't get paid until the deal closes.

Generally those are not worth doing.  Prone to disaster etc.

Make it a Great Day.

Jillian,
Rent to own is fraught with problems and can lead to the owner / seller and agents being sued or worse. From what I’ve been told most state laws discourage it. On the other hand, you can check with attorney Bill Brochick, http://bronchicklaw.com/ who is a national expert on this topic and many other investor topics.

It is where a buyer may have a low credit score and needs a few months to get it up for a mortgage or does not have all the closing costs.

The offer is made for a price and an amount to rent for a period of time; the security deposit here is generally two times the rent and used towards closing cost. There is also a close date that must be met or forfeit the deposit; there is also an earnest money deposit which also goes towards closing deposits.

The rule of thumb is a low percentage go to closing and few sellers  will acccept going this route.

Also the seller could end up with damage to the property.

If all the terms are accepted the buyer would do a property inspection and attorney approval as well as proceed getting a mortgage.

The commission would be paid at close and is whatever the contract states.

I have been lucky and closed two of three.

I have a friend that does these all the time. She has an attorney write the contract and close the loopholes so she doesn't get burned on her properties. She requires a downpayment on the front end and higher than normal monthly rates.

     Some States (including Florida) are cracking down on Seller/Owners who use this tactic to profit off "Buyers" that will never qualify for a mortgage.  

     For example, a Seller collects say, a $2000 option fee, the year goes by, the Buyer cannot get a loan.  The Seller evicts the Buyer and pockets the $2000.  Then the Seller runs the "rent to own" advertisement again, and looks for his next victim.

    Please use an Attorney to draft any documents for a lease/option or rent to own!

Basically a land contact without the potential for lien holders to attach

We don't see many rent to own homes for sale.

Since I typically care about "potential buyers" I find it deceptive. Normally what is done is add a few hundred dollars on top of the rent and say that will be credit back to the buyer at closing. However if you don't close you don't get that money back. We should not prey on those with bad credit and little money. The comments relating to getting a lawyer involved is good however, most lawyers no little about real estate except for contract law. I could go on but don't want this to be a blog post.

Rent to Own, aka Lease Option, is effective when used correctly with the RIGHT client. As with anything else, there are people who will abuse it to take advantage of people who will never qualify.

I've sold several properties on Lease Option. All but one closed in the end. I Several people I know have done a lot a lease options with varying degrees of success. Here's what we have found.

Assuming the seller is honest and ethical, there are two keys to making it work

• The deal must be fair, and priced correctly. If the deal is structured poorly, it likely won't go through, and shouldn't have been done in the first place.
• You must qualify the right buyer.

Assuming the deal is fair:

• Low priced houses are least likely to get to the sale.
• Mid priced depends on selecting the right buyer. (more on that below)
• High priced usually complete; if not, often it is by the buyers choice, not ability.

The key is having the right buyer.

• Someone who has never had good enough credit or been a homeowner isn't likely to finish. If they've been a tenant for years, likely they will remain a tenant.
• Someone who has had a temporary setback will very likely succeed.

The people I've had succeed were mostly previous homeowners recovering from a temporary setback, and were already on the right path. They just needed the time to get there. (Divorce; Bankruptcy from business failure; previous loss of income with new income now)

Commission wise, I would pay an agent for lease up at signing, and if/when the option is completed, pay the remainder of the commission for a sale.

Looking at the length of this response, it's almost a post of it's own.

Sorry, I wouldn't do it. Too many variables that can cause the deal to die. 

They are almost non-existent is this low-inventory market.

Plus here in my area, rentals are almost never on the MLS since they pay so little for time and efforts spent to market/list/rent them. 

Rent to own is not so prevalent in our area, too Jillian La Rocque .

Or I can say, I have not done it so far.

Simply put, as Carol Williams said  - it's a delayed closing and terms and conditions are defined when the 'lease' starts.

One item that has not been picked up on is that many owners charge an above market rent and apply a portion of that against a potential purchase price. If this is done, it is important for the prospective buyer to consult with a lender to ensure that these above market rents are building equity for eventual loan-to-value calculations for the extension of a home loan.

As far as some of the gobblety-gook and totally off the wall "advice" from a particular AR member above, I think she forgot to take her meds. She is delusional. I think we should all feel sorry for her poor clients.

I've done a few...they are a LOT of work and be sure to keep tabs on ALL paperwork, including the rental agreement which isn't between you and the buyer, at all. 

I have to say that for the most part, they haven't come to fruition, BUT they can be a creative way of getting rid of a property. If it's written right, the seller STILL gets the better end of the deal, even if they end up with the property back, as they keep the downpayment, and if it goes to sale, it might be a higher price than the market currently would show if put back on the market. 

This is STILL dicey. Be very very careful!

Sounds like your real question is how you get paid in such a situation and the answer is not simple, but could be structured in different ways, as could the entire arrangement.

Simple?  Rent to own is a deal that's likely to fail.  Sometimes they're a success, but the disaster rate on these is sky high

Rent to own ads usually attract people that can't get a mortgage. Most of the time they rarely work out. The renters usually aren't locked into buying. Cases where they might be worth considering are, if a renter is recovering from a short sale or foreclosure, likes the property, and can provide info showing that they have been working with a lender, and a loan officer has actually given them a list of what they need to do to qualify for a mortgage. Of course, circumstance can change, like the renters lose job, get sued, get divorced, are in a car accident, go out and buy a new car, etc, etc. Another option would just be "right of first refusal", which is similar, and gives renters first oportunity to buy at price sellers set.

Depends on what side of the fence your on. Good for the landlord, not so good for the tenant in most instances.

Jillian, there is no real simple explanation, because it's different in each circumstance.  I bought my house this way, but I had a purchase agreement with a six month settlement and pre-occupancy agreement.  If we settled as planned, we got a chunk of the above market rent we were paying applied to the down payment and closing costs.  If we didn't the seller has a great rental for those six monts.  Most people don't want to be locked into a price that far ahead of time - it was a rising market so not fabulous for the seller.  It all depends.

To be honest, I simply tell potential clients that "renting to own" is not as easy as they think it is.   For example, many times the sellers want a sizable down, only a portion of the rent is applied to the payment of the home, and the sellers can take back the home if not paid and they loose the sizable down payment, ... and then they completely change their mind and we go back to looking at homes!

Rent to own is where the person rent/own typically does not have credit that will provide a lender to loan for a mortgage.

So the renter and owner have a year agreement to lease on terms and then move in to a owner finance situation.

Basically the owner of the property is the bank.

In the state of Texas the owner can only finance for 6 months. Not long term. 

See your local state regulations to learn more. 

I have buyers looking at this as an option as well as other owner financing options.  It has been challenging to find a legitimate win/win deal out there. They have a substantial down payment, and their monthly payment budget is great, but it appears some credit issues may be holding them back from obtaining a mortgage.  In the "good ole' days" that large sum of money would have allowed them to obtain a mortgage.

At this point, I feel that finding a fair deal with this type of financing may be like finding a needle in a haystack, but I will continue the search on their behalf.

I'm following for me info..... good stuff here 

Great topic and lots of good answers, especially Annette of Palm Harbor, Richard of Port St. Lucie and Darrin of Ohio. I was involved in one lease option and it seemed a win for both parties.... it was in 1988 in a stagnant market.

I recommend doing a contract for deed contract with all terms spelled out in the contract.  Have it recorded, just in case something happens to the seller or the buyer.  Seen this work better than any other scenario.