Anna:“Rent-to-own” and “lease-to-own” are generally the same thing, and those phrases can be used interchangeably. Both are altogether different from the VTB (seller financing).
So a few points to consider:
1) Rent/Lease-to-own is the situation/arrangement with your tenant when, eventually ownership of the unit will transfer from you to the tenant. A tenant may like your place so much that they want to buy it, but they typically have (1) mortgage qualification issues and/or (2) not enough money for the required downpayment (5% to 20%, depending).
2) I have not done rent/lease-to-owns, but I have been taught by several REIN members to very careful. The phrasing can be misleading, because the tenant will often think that their all (as in, every dollar) of their rent payments are a form of amortized, monthly downpayments that will go towards their purchase of the unit. This is bad way to do a deal for you (good for them). It is much better to structure a so called “rent/lease-to-own” as a “Lease with an option to purchase”. Two separate contracts, two separate (yes they’re related though) deals. One contract is specifically the lease to only talk about the details of renting. The second contract is specifically the conditions and terms used for the eventual future purchase of the unit. I have been told many times DO NOT combine the contracts! (Other, more experienced REIN members may have more thoughtful comments). If you are a REIN member, there are lots of threads posted on this topic.
3) The advantages to the lease with the option to purchase is that property management ought to be easier, because there is more incentive for the renter to take care of the place (they’re going to own it in the future, why would they damage it). Plus, when structured properly, these contracts can provide up front cash and more monthly cash flow to the owner. And it gives you a legally binding exit strategy. Disadvantage is that you have to pick a price in the future, or have a clause that states you’ll agree upon an appraisal process. Selling an option contract always gives someone else rights, while you become obligated to honor those rights, and you have to be comfortable with that.
4) A VTB is the process that you purchase the property, and the seller (vendor) will provide the downpayment (partial or all of it). You can try to get this in place as the property closes – the bank may or may not like this), or I’ve heard of REIN members just closing on the property with their own money and downpayment, then after closing, the seller will provide a 2nd, mortgage on the property, thereby effectively “refunding” the buyer’s downpayment. Again, I have never done a VTB, so others may have better comments. But I do know that in nearly all instances, a VTB is about financing, and leasing or renting to the seller is not involved or a non-issue (after all, they’re moving right?).
5) The advantages of a VTB is that you can purchase properties with little or no net money out of your pocket. Less money spent per property generally means you can buy more properties. However, you are obligated to pay 2 servicing debts on that property: (1) the mortgage to the bank, and (2) the loan pmt (however structured) to the vendor).
Tough to explain all the nuts and bolts of each concept in one post. Hope that’s enough to get you started.
I do see that you are a REIN member, so have a search through the postings.
Mike
