Much of this information can be used in other states, this article is specific to Minnesota.  I can tell you lease options at this time don’t work in Texas.  This article will cover lease options, rent to own, and lease with the option here for Minnesota.  My experience was that I had quickly done 5 sandwich lease options in the first week I entered the business. Most of my lease options were done from 2003-2006, and I have kept informed and trained some to this day on the topic. I market for the lease option tenants and the landlord to this day.  I have read numerous books on some of the top experts on the topic, as well as understanding contract for deeds, and subject to existing financing, please see my other articles on those topics. Let’s cover rent to own when we are dealing with houses, for this article.

What is a Rent to Own, Lease to Own, Lease Option, Lease with the Option, and or Lease Purchase Option Sandwich Lease Option, Renting in Minnesota?
Each of these industry terms have a slightly different meaning and I’d like to cover each one in more detail below, as well as cover some very frequently asked questions that most people will have.  My goal of this article is to get you the technical definitions, how it’s applied, and real life scenarios that books, audio CD’s and seminars don’t always cover or talk about, only experience can teach you.  Like all of my articles, I like to give a neutral view with pros and cons for both the tenant buyer, or the seller, so that you can see everything from all angles, the positives and negatives.

Rent-Renting with a simple lease or without a lease. With a month to month or with a lease shorter than 12 months on a residential property 1-4 units in Minnesota you may not be using a residential lease, but most people do and it’s recommended to spell out the terms such as whether pets are allowed, what are late fees for not paying rent on time, how much is the deposit, and under what circumstances the renter can receive that back.  12 months is a very common lease term, and if it were to go for more than 36 months you would really need to record the rental lease, but that’s uncommon.  Myself as a landlord or a renter would prefer to have a lease with 1 year renewals at the agreement of the landlord.  A renter may like a 30 day notice whereas a landlord may prefer a 60 day notice.  Most people just rent a property and never get involved in a rent to own, the main reason I believe is that they just don’t understand what a lease option or rent to own is.  There are many standard rental leases available on the internet, please make sure it’s a residential lease and also written for your state’s laws, as each state’s laws differ a lot, especially on the time allowed and how evictions are handled.

Rent to Own-I am going to say that a rent to own is basically the same thing as a lease to own and a lease option.  It’s just different terminology.  I prefer to use the term Rent to Own when working with renters or consumers as I believe the buyer side relates to the term more as they are use to the term with other products, and tenants just recognize the term more easily.  For rent to own descriptions please see lease options below from here forward, but I will continue to use it interchangeably with rent to own.

Lease to Own- Lease to own I would use to mean the same thing as rent to own, I really don’t see the difference, I don’t hear the term lease to own very often, but I thought I’d mention it here, so I will use lease option or rent to own going forward in this article.

Lease Option-I think lease option is probably the most common phrase over rent to own and lease to own.  I think because you are talking about the technical paperwork, so it’s probably the more proper term. I personally use this term when I am talking about educational materials, or with landlords and seller’s as I find it makes more sense to them. Whereas I may use this term with a renter, investor, but more often with a seller, you can use whatever term you like.  A lease option is simply a contract where you use a lease and an option all in one.  It will spell out the terms of the residential lease as well as the terms of the option.  A lease option is typically 1-3 years, that’s just the traditional length of time, I believe it’s because it gives the tenant buyer time to improve credit and their financial situation so they can later purchase.  A lease option as I’ve stated is only one document, it could be as short as 1-3 pages in some cases.  Because it’s tied together, it arguably gives the tenant/buyer equitable interest in the property and could complicate things at the time of default, cancellation, eviction, etc.  Upon on a disagreement on payments, cancellation or moving out, with a lease option you may end up in court where the judge may have to rule as equitable interest and in some scenarios a full foreclosure procedure may be required to be filed by the owner of the property.  This would be the tenant buyers opportunity to follow through and purchase the property before the end of the foreclosure rights throughout this process.  I wouldn’t recommend this method for a seller / landlord.  Likely because it’s the same document, the lease may reference the option and the option may reference the lease, tying them both together, making them nearly impossible to severe in a court of law. It would almost appear as a sale.  Also many would argue with state laws that this could be considered the seller conveying interest clearly in the property to another, where the alienation clause, and accelearation clause in a mortgage may come into effect, where a lender could have the choice to do something. It’s something work looking into with an attorney and the seller’s lender.

Lease with the Option- This is going to be similar to a lease option, except the (with the) seperates the two documents. It gives us an option and a lease, two totally separate documents.  It’s important to state here that each document should stand alone and totally be separate from the other. In other words the lease shouldn’t talk at all about an option, and the option shouldn’t talk about a lease, or if the option does, it should cleary state that a default of the lease negates and cancels the option.  That clause should be in there, and both the tenant buyer and seller should discuss this ahead of time as full disclosure.   As most renters know what a lease is.  The lease could be 1-10 pages long often and spell out the rules often for the landlord side, in favor of the landlord usually, but I still think most leases are pretty standard and have pretty much the same print and guidelines from lease to lease.   Leases will state the do’s and don’t’s allowed with the occupying of the house and the terms of the lease and renting.  Examples of this may be whether pets are allowed, how late payments are handled.  Consequences if anything illegal takes place by the tenant and what will happen.  It may discuss the case of default, or any other occupants living in the house.  The lease may discuss whether the house or property can be subleted. The lease will discuss security deposits, it will discuss who pays for all utilities.  In most all cases the landlord will pay for the taxes on the property, and in certain cities the landlord has to pay water and trash.  The option is usually a pretty simple form, most I have seen are 1/2 page long.  It states what the future locked in price will be, and the duration of time before it expires.  It will often refer to how much the option money is and in most cases the option money is going to be non refundable.  The option will refer to what is needed to exercise the option with the seller.  What’s important to know about this simple idea of exercising an option is that it’s referred to as a unilateral contract what this means is uni-one sided, meaning that the buyer has the first right of refusal, in other words the tenant buyer can purchase the property and excerside the option if he/she wants to, but does NOT HAVE to.  The seller on the other hand does have to sell the property to the tenant buyer if they choose to excersise.  The way out of it for the seller is if the option buyer defaults on the contract or the option contract expires after it’s duration of time.  The option may or may not have signature lines and notary signature spots.  The signature spots should be signed by the option buyer and the landlord/owner/manager who has the legal right to sign for the proprety.  The notary signature spot would require a notary stamp and witness if you want to later record the option.  From my understanding you can record the notarized documents with the county with just the option buyers signature needed.  From my understanding with Torrens property, at the county you will need the buyer and seller to both sign.  If you don’t know the difference from torrens or abstract don’t worry about it, you can ask a clerk down at the county or a title person to help you with that.  It may be a good idea to have both sign anyways.  There is another form I won’t go into here called a memorandum of option or referred to as a affidavit memorandum of agreement. this essentially is a very simple form that should have a contact spot for the buyer likely in this scenario, or the optionee.  This form is also notarized and can be recorded.  Many choose to record the memorandum and not the actual option.  The reason for this is that the memorandum does it’s job of being recorded and put on public record while clouding the title, and everything remains very private.  The memorandum is simply going to state if you want to contact me about my interest in the property at any point in the future, or necessary when clearing title before a purchase closing or refinance closing with a title company you can contact the person on the memorandum form that’s recorded at the county.  Many don’t want to record the option contract itself because the option contract states the price paid, and the buyer or seller may want to keep this more private and not on public record, especially so if the buyer were ever to get paid to do an assignment of option, where they will assign over their option to a new buyer who would then be paying for the equivalent rights of the original option buyer. According to the option, there may need to be an agreement to do this from the current seller.  This section sounded more complicated than it really is. Most people have seen a residential lease before, and an option is simply about 1/2 page and spells out the price, option consideration, and duration of time before it expires.  Because the option is seperate in this scenario, when a tenant defaults on the lease, the court system will treat the tenant under tenant laws and a standard state eviction should be able to be processed.

Lease Purchase Option-A lease purchase option is going to be pretty similar to a lease option except for the word “purchase” which is likely to include a purchase agreement, and possibly a closing date, and set amount of time.  This would be much more of a commitment from the buyer, and may require more substantial money from the seller/landlord of the property.  As with purchase agreements in this state, it will give the buyer equitable interest in the property.  It would likely have to require a cancellation of the purchase agreement someday if needed, just like with a standard purchase agreement.  Much like most purchase agreements, they are usually bilateral agreements, meaning both the buyer and seller are asked to perform on the property.   Simply put the seller will have to provide clear title usually, and the buyer would get new financing to cash out the sellers existing financing.  I would explain this as a lease with a purchase agreement.  I feel it’s much more of a serious commitment from a tenant buyer, and a substantial down payment may also be used in this scenario.  Check with an attorney and a tax accountant on this, but this scenario may even allow for the buyer to pay property taxes and interest in this scenario, and receive the tax write-offs.  With a purchase you may end up using a real estate agent and a standard MAR (minnesota association of realtors) purchase agreement forms, and you may need to use all disclosure, etc to protect all parties.  Contact me and we can have an agent work with you today.

Sandwich Lease Option- This concept is more advanced and typically more for investors, who may want to take on an unlimited amount of these properties.  This would be very similar to a lease with the option, but may include more additional features like the allowance of subletting the property in the terms of the lease. The investor is going to be in the middle of this transaction, that’s why it’s referred to as a “sandwich”.  In other words the investor gets the property on a lease option from the landlord/seller at a certain price, and will likely lock in a competive price then turn around and do a lease option with a new tenant buyer for a higher price to make the spread in the middle.  This would have to be agreed upon by the seller, and will take some more advanced methods to get it done.  For example you will have to determine who pays for repairs, how expensive how small, etc.  When it comes times to close on the loan it could require a simultaneous close (2 closings at one time) this will create a title seasoning issues with almost all lenders, so more advanced techniques may be needed.  Such as talking to the title company, getting the lender on board, paying of the investor with an interest in the property and doing 1 closing.  You could get even more advanced with land trusts and simo closes, but that’s too advanced for this article, maybe on another post.  The investor will likely keep the option money from the new tenant buyer, and will likely deal with the tenant buyer. Discussions will need to be made on who the manager of the property will be and an investor may want to do their lease option in the name of their LLC or Corporation on the lease, as a form of asset protection.  I started out with lease options by doing sandwhich lease options. I learned a lot from it and made mistakes along the way.  My biggest concern with sandwich lease options these days as an investor is recording the memorandum of option and also how I will get paid at the closing table years later when the buyer has new financing, so talk to some lenders and title companies to see how this could work and be structured.

Pros of Lease Options for Tenant/Buyers-The pros of a lease option for a tenant buyer is that they can gain equity by locking in a price today.  A locked in price with the addition of appreciation can really leave a lot of equity for a tenant buyer years later.  An investor buyer could put unlimited amount of lease options under contract in theory.  The buyer doesn’t have to follow thru on the property and exercise the option if they choose not to.  If the buyer feels the house is not the right house, or has gone down in value or not up in value at all, the buyer can choose not to record the option, this is a huge advantage and pro to the buyer.  The buyer may also build equity through monthly rental credits if the seller and buyer agree to do so.  I personally don’t do this as the buyer or seller, but the way it would work is that a portion of the monthly rent could go as a credit towards the purchase price of the property, lower the property price by “x” amount per month, and at the time of purchase the purchase agreement could be agreed on at a lower price. This gives the tenant buyer a chance to build in extra equity in addition to their option money.  If the lease allows subletting the tenant buyer could allow for some help from other tenants or roommates to help pay for things.   Lease Options are great for buyers , and allows them to control one or many properties for a fairly affordable price.  Most lease option properties are in pretty good condition, so this is a great concept.  Most lease options allow 1-3 years to allow for the tenant buyer to increase their credit score, so that when it’s time to finance they can get financing and a much more competitive interest rate.

Cons of Lease Options for Tenant/Buyers- The cons of a lease option for a tenant buyer on a lease option is that the landlord can still evict you if you don’t make the payments.  Evictions don’t take that long.  If the tenant buyer has more money to put down, they may want to do a contract for deed, where the cancellation process is longer than an eviction.  Tenant buyers have to put down option money which is almost always non refundable.  As another negotiable item some landlords may not count the option money towards the purchase price, or may not give rental credits. The tenant is able to at least try to negotiate this with the seller.  Tenants still have to consider that when they make payments to the seller, they have to have checks and balances in place to make sure the seller is making those payments to the bank.  Sellers have been known not to do this and keep it and have the house go into foreclosure, but this is true of any rental situation, tenant buyers need to just double check this with landlord / sellers.  Tenants put down option money, if they don’t work really hard on their credit score to improve it, they may not be able to get financing in the near future.  Another disadvantage for a tenant buyer is that based on some situations with their previous house, whether it was a short sale or full foreclosure, they may not be able to get financing for quite a few years, and the lease option may have been written for far too short of a period of time, when they needed longer to allow for financing and the foreclosures to come off their record, credit report, or not disqualify them for financing.  Another disadvantage for a tenant buyer is if they have very little option money they may have very limited choices on which houses to choose from.  If they have less than $3000-$4000 option money they may have to go search and find sellers themselves, they maybe can’t work with an agent, since their is not enough money for an agent to be paid on the transaction.   The possible biggest concern for a tenant buyer on a lease option is that at the time of closing they still have to be concerned about the title work on the property.  What I mean by this is who are all of the sellers, are they around to sign as sellers on the property, has anyone been recently divorced or deceased. Is there a need for a power of attorney.  Are there sellers in other countries.  Will the sellers participate when the time comes.  Will the sellers feel like they have too much equity.  Will the property be encumbered with a lot of liens, IRS liens, judgments or anything else from the property itself or from the seller’s credit situation.  This could happen at anytime during the years that you have an option on the property.  Their are advanced ways to get around this, too much to cover in this article, but it would require anything from having the seller pre-sign a deed and put it in escrow with a title company at the original time the lease option is signed.  If there is a divorce, etc you may have to check with an attorney or title company if everything still needs to be resigned before closing.  Some protection of judgments and liens can be avoided with the use of land trusts with conveyance from the original deed where the seller remains the beneficial interest.  Land trusts are for another blog post.   Learn to get to know the seller, trust them, and become good friends.

Pros of Lease Options for sellers- The pros of a lease option for a seller is that they typically sell a house for a reasonable price and with flexible terms. The seller can sometimes sell hard to sell houses on a lease option.  Because they are selling to someone with owner financing that can’t get financing today the seller is usually getting a decent sales price on the property.  The seller would still get the property tax and interest write-offs on the property as they still own the property.  The seller doesn’t have to pay taxes on the option money until the option is exercised or expires.  The seller still owns the property and some say on what’s done with the property and most of it is controlled if they are also a landlord on the property.  The seller can more easily evict a tenant through the terms of a lease in Minnesota than if the seller sold the house on a contract for deed.  If a seller sold on a contract for deed it takes much longer to get the buyer out through a cancellation and notice, possibly 60-90 days minimum, whereas with a rent to own it could be a few weeks.  This is typically the reason a seller/landlord will allow for less money down for option money than on a contract for deed. Either way the seller is going to make that money non refundable, which is a great advantage for the seller. Typically a house available with owner financing because of it’s flexibility in terms, landlords often get above market rent.  Landlord sellers often find that rent to owns are a great way to rent or sell large expense properties that are nice.  Most people will agree that a rent to own tenant will take far better care of a property than a renter will.  A seller could put together a lease option in 1 hour, where a contract for deed may take more time and an official closing with more paperwork and recording of a contract for deed.  A lease option may not need to be recorded.

Cons of Lease Options for Sellers- Cons of a lease option for a seller is when they don’t receive a very big option payment from the tenant, there is a tendency for the tenant to never excersise the option as they don’t feel they are walking away from anything or any real money.  Another disadvantage for a seller on a lease option is if the tenant never takes care of the property or takes the transaction serious.  If the tenant never feels like they got equity they may not follow through at all, they may try to reappraise the house years later.  The tenant may not work that hard on their credit repair or may not be able to get financing later on.  One of the biggest mistakes a seller can make on a lease option is lease out their own homestead for over 3 years, the reason is that with the universal exclusion law concerning taxes at the time of this writing, the principle residents allows for $250,000 write-off on taxes for a single person and up to $500,000 for a married couple on their principle residence, with the stipulation that you had to own the property 2 of the past 5 years. If you as the seller lived in the property for 2 years+, which is likely, but then rented out the property over 3 years and then some tenant buyer cashed you out, you have no longer owned the property 2 of the last 5 years, this could be an extremely expensive mistake, and few people talk about it on websites or in books.  If the seller/landlord structured the lease and option wrong so they were tied together, and referenced each other, it could be costly, and very time consuming to go through court and be forced to foreclose off any equitable interest in the property from a tenant buyer.  Keep the lease and option separate.  Sellers may want to talk to an attorney, it may be worth it in the end.  The seller should keep copies of cancelled checks that were paid for rent over the years, so when the buyer needs that for new financing some day, the rental payment history helps on getting financing, this takes some time and discipline but a seller should do this.  Sellers may not like to take the time to figure out the monthly rental credits.  Sellers will need to figure out a way to get paid at the closing in the cases where they are in the middle as investors on sandwich lease options.

Lease Option Continuing Education- If you want to learn more about lease options I would recommend following the teachings of Wendy Patton, Peter Conti and David Finkel. Those were may favorites and they have many audios and books available on the market and amazon.   David Finkel and Peter Conti-Buying Real Estate Without Cash or Credit and Making Big Money Investing in Real Estate: Without Tenants, Banks, or Rehab Projects.  For Wendy Patton Investing in Real Estate With Lease Options and “Subject-To” Deals : Powerful Strategies for Getting More When You Sell, and Paying Less When You Buy.  These books will get you started on your way to buying many lease option properties and will cover in more detail how they work and how to avoid pitfalls and well as usual tips and tricks.  I have been to Wendy Patton seminars which I’ve enjoyed.

What if you default on payments- If the tenant were to default on the payments of the property the landlord or manager of the property will likely treat the situation like any other rental lease situations.  If the lease has been violated for lack of payments or any other reason then the landlord or manager will likely file an eviction and go through the court process which may only take 3-4 weeks to evict the tenant. The tenant can try to catch up the payments, make arrangements with the property manager or landlord or they may simply need to move out gracefully.  If the tenants want more time in case they would miss a payment maybe they should put more money down and buy a contract for deed property. We have a blog post about contract for deeds on this blog.

How are taxes handled with Lease Options-With lease options as long as it’s not a purchase, the seller is typically paying the property taxes and making the mortgage payments, so the landlord/seller is getting the full tax benefits. Which include depreciation of the property, interest write-offs, and property tax write-offs.  The seller may get some of these write-offs because it’s considered an investment rental property whereas before it was probably a homesteaded property.  On a contract for deed a buyer would get the benefits of these tax breaks, so it’s something for the seller and buyer to both consider when decided on a rent to own vs. a contract for deed.

Rent to Own vs. Contract for Deed- This is an often asked question and a very good one. What are the differences from a rent to own compared to a contract for deed. Most of the differences come down to taxes, how ownership is given and how default of the contract is handled.  Also how much money is customarily needed. How a lender sees the two are all factors that differentiate the two.  Most every difference is described in this lease option article and if you compare it to the contract for deed article I wrote you can see the clear differences, so since almost everything is covered let me sum up the differences in this paragraph easily.  Generally speaking the seller gets the tax write-offs on a lease option and remains owner, where as on a contract for deed the seller loses homestead and ownership writes and the buyer gets those tax write-offs transferred to them.   Contract for deeds takes longer to get the buyer out compared to a tenant through an eviction because of this and the tax differences the seller generally will always ask for far more money down on a contract for deed.  A contract for deed needs to be recorded within 6 months in Minnesota or a penalty may be incurred.  The contract for deed being recorded will put the buyer on record publically and a lender will see that as a starting point as ownership on title and makes for a much easier refinance of a loan in the near future, possibly 1+ year later where as with a rent to own, you are likely to need to treat it like a new purchase. If you have a memorandum of option recorded and canceled checks for 1+ years you may get a lender to understand that, but it’s much easier for them to understand the contract for deed.  Contract for deed purchase will require a closing, where a lease option wouldn’t.  A contract for deed will probably deal with property taxes and proration of taxes, etc.  I personally find contract for deeds a more serious purchase and are more likely to be followed through some day.  In either case if a buyer or tenant had anything recorded with a cloud on title or equitable interest, they may need to quit claim deed the interest back to the seller to clear the title.  Sellers can wait to pay taxes on option money until it’s excercised or expired whereas with a contract for deed, their could be some immediate payment needed on funds received and or capital gains, please check with your accountant on this.  In a nutshell more money down with a contract for deed usually makes a contract for deed make more sense over a lease option, at least for the seller.   As a buyer I like being able to simply refinance the property later on, and actually owning the property.

How much money is needed- Before we get into how much money is needed for rent to own or rent with the option, let me discuss where to get the money.  I have come up with a page to find the EZ money in 24 hours.  Also you can get business credit lines unsecured.   Typically you can get into rent to owns for $3000-$8000.  I’d prefer to work with those with $5000+ just because we need to get the agent paid for doing all of the work and let the seller keep some money. If you have $8000+ we can put you to the top of the list.  On a contract for deed, you may be able to get it done for less than $7000 down, but I’d recommend doing a rent to own or work directly with the seller as their just isn’t enough money for every agent and seller to get paid.  If you have $8000+ to work with and want a contract for deed, I can try to have an agent work with you.  If you have $12,000+ to work with I will make you more of a top priority and put you near the top of the list, we really need for sure over $10,000 just to get the agents some money and the sellers.  If we are dealing with MLS properties which we likely are, then most sellers and listing agents will require 10-20% down to be able to pay out agents and let the seller keep some money on a contract for deed.  If you are just doing a lease option let’s try to focus on $5000-$7500 for now.  Just remember this money is likely to be non-refundable so just make the right purchase and be serious about working on your credit repair so you can later get financing on your option to purchase.

What are some big mistakes I must look out for-Some of the biggest mistakes you can make in the rent to own business simply are related to tenant damage, not enough option money received as a seller, and selling on a lease option as a seller for over 3 years and losing your principle residence universal exclusion write-off, that would be a big mistake. You can lose out on a few years for both buyers and sellers.  You could lose out on appreciation in both scenarios.   You could have arguments about items not stated in contracts or leases which should be.  To avoid future disagreements try to cover as much as possible in your contracts.  Buyers could not check out to see if the seller was making the payments over the years.  The paperwork could not be signed, not be recorded, not be filled out.  The property may not appraise in the future. A big mistake for both parties is the tenant buyer not working hard on improving their credit score through credit repair.  This is highly recommended to work with a credit repair expert.  You can try credit savers group or Todd Rooker with Armour Financial in Maple Grove.  Get things in writing, and take the transaction serious and you are less likely to make mistakes.  As a buyer spending money and years to find out the seller never owned the property or has other liens, judgments or others with interests in the property without knowing the full picture, this can be a very big mistake for a tenant buyer.  One thing that’s recommended before you follow through and do a lease option is to get an E & O done with a title company. I think for about $75 or a small price you can learn who has Encumberances and who has an Ownership interest in the property.  You could see if you can buy title insurance to protect yourself.  You could have a real estate agent or an attorney review the paperwork for any mistakes or potential future problems.  As a buyer you could buy a rent to own where the seller is behind in payments or in foreclosure, that would not be wise.

What if I want to sell my house on a lease option / rent to own with an agency- If you want to sell your house on a lease option and need an agency and or agent to help you with this, I can help you with this simply leave a voicemail for me at 763-300-1648.  I will let you know this could be a 1 month fee at a minimum possibly more as we would keep a portion of the option money.

What if I want to buy a house on a lease option / rent to own, who do I contact-If you want to purchase a property on a lease option and you have at least $5000+ to put down then please email me ron@minnesotainvestors.com and I’ll have an agent ready to help. Please know exactly what you are looking for, be ready for a property in 45 days or less, and we’d ask you look at less than 8-10 properties, preferably 5 before making a decision.  If you need to look at 20-25 properties maybe you can do some research online before you contact us.  If you are short of the $5000 then please see our pages above on easy personal loans, so that when you contact us you have $5000-$10,000 so we can get started right away helping you find a property. The reason we need you to have this money is so the agent who works with you makes some money for all of the legwork and the seller still gets to keep some money.

Where do I get rent to own / lease option forms- I have all of the forms needed to do these rent to owns from leases, options, memorandum of option, contract for deed financing addendum, purchase agreements, disclosures for purchase agreements, and contract for deed form to be recorded.  I give these forms to my agents that I network with to help out tenant buyers or clients of theirs, those are the only ones that have the forms for now.  For a lease with the option you will likely only need a lease and an option.  For a contract for deed you will need purchase agreements, contract for deed form for personal and contract for deed financial addendum, all standard real estate agent MAR forms.  I’ve used and closed with these forms below.

Where do I find a list of properties available on a rent to own / lease option- Most people like to search the Minnesota MLS for their properties, but I must warn you that ALL of those properties are for sale, in fact only a few are available on a contract for deed with a large 10-20% down payment, you maybe could get away with less. Very few are going to allow rent to own, you can look, but many of those people want to sell and be cashed out.  We can get you on some rental sites to find you something that works for you on a rent to own. I prefer to have you work with one of our agents and have him/her look for a property for you, negotiate it, and do the paperwork, and look out for your best interests, and then when you pay the option money to the seller, the seller can pay the agent, that’s one way to work the transaction.  Let the agents experience work for you, you don’t want to learn this the first couple of times on your own, or make any big mistakes.  Please email me ron@minnesotainvestors.com if you have $5000-$7500 option money to get started with a rent to own.  The more you have, the higher priority we can make you on the list.

How do I later qualify to buy a house on a rent to own-Once you put together a lease option, the paperwork and you are living in the house and living in your future dream home that you want to later get financing for, the agent or a credit repair person can help you put together a plan.  I will write future articles on how to do some credit repair, but these credit repair people do a great job of paperwork, mailings, and teaching you how to get your credit score up so that you can later qualify.  They can help remove negative items off your credit report, they can coach you as to how long each thing takes.  They have very good systems that they can help you out with.  You can try Credit Savers Group or Armour Financial with Todd Rooker in Maple Grove as your credit repair companies.   It will be important to get your revolving credit card debt below 50% balances, then eventually below 30% balances.  We’ll want no late 30 day lates eventually, we’ll want to make sure you have a good paying rental history, and maybe even get that to report to the credit bureaus.  We want to remove negative collections and judgments from your credit report whenever possible. We want to get inquiries off your credit report as soon as we can.  Every negative item that can be removed, and every positive step we can make with existing revolving credit, open trade lines, closed trade lines, installment loans, etc help.  Sometimes positive tradelines, joine accounts can be added to add positive affects to your credit report and score.  There is so much to know about credit scoring and improving your score so that you can later get a loan, let’s put you in touch with an expert, the fees are reasonable $99-199/month and it’s well worth it based on what they can negotiate on the balance, interest rates, or the future savings on anything from car insurance to home loans which will save you thousands.  One thing is for sure, once you get in the house on a lease option, take things serious, work on your credit, and try very hard over the months to get that credit score up so that you can get financing.  After awhile we can put you in touch with a loan officer.

When shouldn’t I do a rent to own or lease option- There are certain times you shouldn’t do a rent to own or lease option.  As a buyer you shouldn’t do a lease option if the seller is in foreclosure.  If the seller is behind on payments, please make sure they will get current or have plans on being current before you spend much time or money on it.   If you aren’t going to take care of the place and treat it like a rental, etc. I wouldn’t do that to the landlord, save everyone’s time. If you think you will relocate in a year or two and likely won’t buy on a rent to own, tell the landlord you want to just rent for now, don’t put out any false hopes.  If you had a recent full foreclosure, a 1-3 year lease option probably isn’t going to work, as it will take more time for the foreclosure to get off of your credit report or satisfy your lender.  If you sold your house on a minnesota short sale, you may find that you can get financing as soon as 2 years later.  If you can’t afford the payments or are stretching hard, or a soon to be health problem or job loss could put you in a tough spot, I wouldn’t do a rent to own. If the seller has a house on an adjustable rate mortgage, you may want to be very careful that the seller can afford to keep paying that, or if they are trying to pass that on to you.  If the house needs a ton of work, and you don’t have the time or money to fix it up, it may not make sense to buy that house on a lease option.  If for any reason the seller has a complicated problem with title, divorce, other owners, liens, judgments, credit issues, or future credit issues, all of this could attach to the title of the property and eventually be your problem years later whether you like it or not, as your new lender will ask you to clear the title before purchasing, this could really eat into your equity.  If you don’t think there is potential for future equity you probably shouldn’t rent to own the house, there isn’t a lot of upside then.   I would recommend you live in the house for 5 years , maybe only 1-3 years during the rent to own term, but after you financing you should live in it still a total of 5 years with the two combined. The reason there are expenses when you sell a house, holding costs, closing costs, real estate agents fees.   You should buy a house that’s the right size for you. If you are single or two people, 3500 sq ft may be too big, you may not have time to clean and maintain it, don’t underestimate this, a house sitting there still costs a lot of money every month and year.

When should I most often do a rent to own or lease option-I would most often do a lease option on nice houses in good condition.  Whenever you get a deal on monthly rent, or some equity in the house today or future equity it makes a great lease option for you.  Doing a lease option is almost always better than just renting, since you have the option to buy or not buy, why wouldn’t you want that option. If the market goes down, then you are safe if you choose not to buy.  The important thing is to work with an agent to cover the details of these transactions.  Don’t get me wrong, most people can do 50% of this on their own, but it’s highly recommended that to get it done right that you work with an agent, that’s what they do for a living, they know what to look out for.  Even if the agent doesn’t do rent to owns / lease options every day or month, he/she still understands houses, titlework, loans, etc to some extent.

Can I do lease option / rent to owns with investment properties- You can do lease options with investment properties, I would recommend doing sandwich lease options, with your company on the lease, and never more than a 1 year lease, possibly 1 year renewing extensions.  Your company on the lease will limit some liability, don’t get into any long term leases like 3-5 years just in case.  Also you are going to want to make sure your lease allows you to sublet the property and assign your option to someone else for a fee.  In addition you’ll want to spend some time with a title company to see how to best structure this, as years from now when you excersise your option because the tenant buyer is exercising it from you, you will need to know how to get paid on the transaction.  It’s not as easy as just telling the title company or seller I want to get paid, it’s in my paperwork, you have to understand that it has to be listed a certain way on the HUD-1 settlement statement to satisfy the new buyers lender, this is where the title company could maybe give you some ideas based on experience, do research ahead of time, not every title company has heard of these types of transactions, many haven’t.  Title companies are going to tell you they can’t do simocloses, they will say they aren’t legal, that statement is kind of true, as they feel they are looking out for lenders and can’t hide anything from lenders. There are other ways to structure these with land trusts, which I won’t get into now, but also you may just find another way to get paid on the HUD-1 without doing a simultaneous close, talk to an attorney or title company.

Can I just use an option and not rent- Use can choose not to rent, and just use an option.  That would be just called using 1 form, the option form. You would just choose a price to lock in, duration of time before it expires, and put up some money as consideration.  You will still want terms of your option filled out.  You could use an agent or an attorney for this. Depending on the property it could be a simple 1/2 page option or a complicated multi-page option contract.  Options may make sense with areas of great future developments or possible future expansion or appreciation.

Who do I make the payments to-Most sellers/landlords are going to ask that you make the payments directly to them or to the manager of the property.  Sellers will ask that you do that.  If the sellers allow it you could make payments directly to the lender just to make sure they are being paid. If you do make payments directly to the seller or manager, try to have a relationship with them where you can know payments are in fact being made to the lender, so their are no possible future foreclosures or other issues.  Keep in mind your payment is likely not the exact amount needed for the lender, so the seller would have to send in another random amount, hopefully this isn’t confusing to the lender and their are no problems applying payments.  As a buyer you likely aren’t going to benefit from the principle reduction payoff along the way, the seller is, as you have a locked in price, but I suppose anything is negotiable.

Will the seller’s lender mind that we are lease optioning the property-Some lenders will prefer that the seller not lease option the property.  They don’t like the seller’s conveying interest in the property. This allows lenders to use their acceleration clause. You can talk to anyone who has been in the business for 5+ years and all of the people they know and ask if they have ever heard of it happening as long as the payments are being made, I haven’t heard of it happening at all.   My personal opinion is not recording a memorandum of option, and keeping the option and lease seperate are more likely to not have problems from a lender.  If the seller keeps the insurance in their name, and the rent to own tenant keeps the renters insurance in their name, you probably won’t have a problem, make the payments on time.  If you feel the need to send a quick email to the lender as an FYI that based on credit situations and the current market the house has to be bought and sold on a rent to own for the time being, I believe lenders would be very use to this.

Can I lease option a property in foreclosure-I would not recommend lease optioning a property in foreclosure at all, you are often talking about a house in default, and if it’s before the sheriff sale needs a large amount of money to reinstate the loan to stop the sheriff sale.  You may need to do a forebearance, or recast the loan, mortgage modification, etc.  I would recommend that you either try to purchase the house with financing, but the time clock is limited on foreclosures, unless you can come up with the amount in arrears before the sheriff sale to stop it and reinstate the loan.  If the house is in foreclosure after the sheriff sale in the redemption period, then the lease option is kind of limited at that point, it doesn’t make sense, what you could do is get the seller to assign their redemption rights so that you can get financing quickly and buy, but most redemption periods, not all, most situations you are talking 6 months from beginning to end.   You also may not want to lease option a property where a seller is in bankruptcy, or if you do, make sure you work with an attorney on this one, this is not something I feel most agents will have a grasp on.   In a nutshell foreclosures are a rush against the clock, the seller is foreclosing off interests in the property so that they can get the property back, why would you add additional interests only to see them wiped out.  Treat a foreclosure as a straight purchase, but not recommended as a lease option.

Can I lease option a property that is bank owned foreclosure-I don’t think you will find a lot of lenders that will lease option you a property.  The lenders own these houses free and clear now and they need to get cash and get them off their books, these houses are holding them back, and really not allowing them to make up to 8:1 times on loans.  They need to sell these houses, these are not houses to buy with owner financing, lease options, or contract for deeds, it doesn’t make sense for the bank to do it.  Some construction loan banks, or smaller banks may do a contract for deed with a high down payment, it may be possible, but as a general rule, bank owned properties, or anything that is behind in payments, or needs substantial amounts of work is not recommended for a lease option.  You want nice houses, in good condition, you can afford, and later want to buy from sellers in very good financial situations.

Can I lease option a short sale property- This is going to be very much the same as a house in foreclosure, there isn’t much of a difference in my mind. The house in foreclosure above may have some equity, the short sale house probably has no equity so it wouldn’t make sense.  In addition these transactions will be subject to bank approval, or 3rd party approval, so you would be dealing with other people and title work.  I would only do short sales if you have financing in place and can buy for the heavily discounted price from the bank and seller. These are not the type of transactions to buy on a lease option.  Lease options are for clean easy deals without foreclosures, short sales, or bank owned.

Can I change my lease option to a contract for deed-I have heard of people doing it, so I don’t see why not. It would take agreement by the buyer and seller.  The seller may require more of a down payment before they allow for a contract for deed.  Some may ask the question why would someone change from a lease option to a contract for deed.  The main reason I would do it as a buyer is this: I would cancel the lease option contract, then I would rewrite the contract for deed, and record the contract for deed.   As a buyer what this simple thing did for me is giving me a lot of tax benefits as a buyer now such as depreciation of the property(not if you homestead or live in it), I can use interest write-offs and property tax write-offs, check with your account on this, certain write-offs apply to only investment properties and not homestead owned properties.  This aspect for taxes I like a lot, but the other reason is I now own the property and show as the owner on the property, this can be easier for everything as simple as getting full authority from the cable company to do installation on the property in the future.  One thing that is very important is with the recording of the contract for deed and you as owner in the public records, you have started the time clock on title, and usually within 12 months if you qualify for a loan, you can simply refinance the property instead of treating the house as a new purchase.  The reason this is important for you is that with a refinance you can use the appraised value, meaning you could do a 90% LTV (Loan to Value) refinance pretty easily these days with good credit.

How do I structure my rent to own for the lender regarding financing- Their are a few ways to structure the rent to own to satisfy the lender in my opinion. I would make sure the seller/landlord keeps cancelled checks of all rent payments as the lender will like to see that and may later ask for a VOR (Verification of Rent) form at the time of the loan process.   Also I think it’s easier to just take all monthly rent credits, option money, sweat equity, and other deals in the lease option contract and simply use that to reduce the purchase price per the agreement.  That way you go in for a lower priced loan, which gives you a lower payment, you recognize your equity be getting a cheaper price and you don’t confuse the lender. If you try to explain I have 1/2 the down payment here, and the other 1/2 here, you will probably find most lenders won’t understand what you are talking about, and also may now allow that to be used as a source and seasoned down payment.  The lenders certaintly aren’t going to let the seller show as providing the down payment, so you will need to just reduce the price.  Try to avoid a simultaneous double closing, try to get everyone easily paid on the HUD with 1 transaction and closing.  If you record the memorandum of option or option by simply recording it, the lender may find this to be more beneficial to you with you showing a form of ownership.  Maybe the underwriter for the lender will like this.

How will the agent get paid on a rent to own / lease option- The way the agent usually gets paid on these rent to own transactions is that the buyer pays their non refundable option money to the seller. The seller than should agree or disagree with the buyer if that option money is applied to lessen the purchase price balance if the option were to be excercised some day.  The seller than has to make less of a profit and pay the agents involved in the transaction for doing all of the hard work, such as searching for the properties, getting buyers access to the properties, doing showings, doing the paperwork, help with credit checks, leases, options, and phone and drive time and gas. Agents work very hard doing legwork on these transactions, so sellers owe them for their hard work and time.  If the tenant buyer has less than $5000 to put up for option and deposit money then their may not be a way to keep agents in the transaction as the seller will expect to keep most any money left.  We prefer to work with tenant buyers with $5000-$10,000.  We provided links above on where to find the money.

Ron, what is your honest opinion on rent to owns and lease options as a strategy in general-My honest opinion about rent to own is it’s a great flexible solution for both buyers and sellers. It can be a very win-win transaction, and I like that it gives the buyer time to get their credit repaired so they can later get financing. I think a buyer should take it serious, respect the property and take good care of it, and most of all the buyer should not take the opportunity for granted. What I mean by this is the tenant buyer should work very hard on their credit repair while they live there, and most of all put down a real option payment, if they don’t have an option payment today and say they will later on, I find these people are rarely serious and the transactions don’t go that far, so it might as well be a rental at that point.  I like the concept if the tenant buyer and seller both take the transaction serious and real money of $5000-$10,000 is put up, then everyone take it serious and works hard towards the end goal.

This is a program that should get a lot of people out buying houses with it’s many possibilities. It’s the 203K program which works with FHA financing and it’s got a very high 97% LTV and I find it to be a very aggressive loan program for rehabbers in this market.

*One Time Close

*3.5% Down Payment
(Value is determined by Appraisers estimate of the properties value after completing the proposed project)

*Up to $35,000 Available for Rehab Project

*50% of Total Rehab Amount Available the Day of Closing (No Waiting for Funds)

*6% Seller Concessions

QUALIFIED REPAIRS:

Minimum Down 3.5% of Total Project Cost (Funds can be own or gifted)

Repair/ Replacement of roof, gutters, downspouts with permit

Heating/air conditioning- possible permit

Upgrade/Repair plumbing, and electrical systems with permits

Septic system and/or well repair or replacement with permits

Replacement of flooring, windows, doors, exterior wall re-siding

Minor remodeling such as kitchen or bath with no structural repairs, permit maybe required

Painting of exterior/interior

Purchase and installation of appliances

Handicapped accessibility improvements

Weatherization, painting, basement waterproofing

Repair/replace/add deck, patio or porch with permit

Minor remodels that do not involve structural repairs

Basement finishing and remodeling, which does not involve structural repairs with a permit

Pool repair maximum of  $1,500 in repairs allowed

NON-QUALIFYING REPAIRS:

Major rehabilitation or major remodeling, such as the relocation of a load-bearing wall;

New construction (including room additions);

Repair of structural damage;

Repairs requiring detailed drawings or architectural exhibits;

Landscaping or similar site amenity improvements;

Any repair or improvement requiring a work schedule longer than six (6) months; or

Rehabilitation activities that require more than two (2) payments per specialized contractor

NO to a garage, unless you are repairing an existing one. Cannot build a garage.