My mom has a house in Moose Jaw that currently has tenants in it. They have broached the idea to her that they might like to rent-to-own the place from her. I am not sure this is in her best interests - she has no idea if they are reliable people or not, and she lives 7 hours away here in Calgary. She is also 63 years old, and doesn’t need any long-term, ongoing hassles in her life. The house is not worth a huge amount of money (my wild-ass-guess would be around $40,000), and is not in fantastic shape either.
In my opinion, she would be better off with a traditional sale, where the tenants pay her the down payment, they make arrangements for a mortgage with the bank, the bank pays my mom the full amount, and the tenants pay the bank. If they can’t afford the 5% down payment ($2000 on $40,000), and/or the bank won’t give them a mortgage, then I wouldn’t consider them good risks to pay out the rent-to-own agreement without difficulties.
I don’t know much about rent-to-own agreements, but I think they are between the seller and the buyer, with no bank involved, and the house reverts to my mom if the tenants default on their payments, which puts her back at square one again.
Anybody been on either side of a rent-to-own situation? Any words of advice or caution?
I agree that selling it would be simpler and have fewer potential pitfalls.
I heard from a broker about rent-to-own as being a good thing for the seller, who takes a big down payment and a substantial monthly payment/rent. The buyer presumable treats it as his own. To actually make it good for the seller, the wording of the contract must be set up so that if the buyer slips up, the seller can keep the down payment, evict the tenant, and do it again. This can be lucrative. It also requires a certain attitude on the part of the seller, which your mother may not have.
A house next door to a friend of mine’s had this happen; the buyer optimistically put a lot of money into making the house nice and then hit a cash-flow hitch. Bye-bye, and the original owner kept every cent and sold it again.
If you and your mother do not see this as a Good Thing, she is exposing herself to all the hassles of remote property management combined with those of a messed-up sale, in other words all downside.
So other than a basic straightforward sale of the property, she would have to choose between being an it’s-all-for-me dealer, or a pushover, on 98% of the resulting circumstances. IMHO.
And even for someone going for the loot, an installment sale on a property seven hours away would not be desirable.
I would put the house up for sale and let the tenant qualify for a mortgage, if they can.
I was the renter in a rent-to-own situation once, but I don’t think it was a very common set up, because it was family.
We were living in the house already with my ex’s grandfather died. The house went to my father in law and his sister. The father in law had no problem with us staying. The sister asked for $600 in rent, with the stipulation that if we decided to buy the house, 2/3 of the 600 would be considered payment towards her half of the house.
So nothing changed, really - they owned the house, we were still tenants, but when the time came to buy, we just paid them that much less. And from speaking to mortgage brokers, if our credit had allowed us to pursue a conventional loan, we could have used that amount as a gift of equity from the sister.
You’re right about the small amount needed for them to qualify for a mortgage if they have good credit.
And if they don’t, I would never go for it. The key is that at any time renters can turn on you.
I manage rentals of many small properties, and people will have a simple problem, like a car that breaks down and they need all their cash to fix it. The rent is late, and they are quite bitter at the landlord for telling them to pay or quit. The relationship instantly deteriorates and damage ensues. Nice people turn ugly when the money’s gone.
So, I would suggest she at least get a clean credit check from them.
I don’t know who does credit checks in Canada, but in the US there are 3 main ones and they all will allow the person to obtain their own credit listing for free once a year. And I’ve had some people give me a special “creditor access password” that allowed me to see the information directly on-line, so it couldn’t possibly be altered.
Whatever she does, she must never let them prepare the paperwork. Check the yellow pages or call an attorney referral service to find someone on her side to write the paperwork.
There are a lot of con men who know the law, and all its fine print, and are quite willing to take advantage of elders who own property they cannot directly oversee.
You may find that if they draw up papers there will be a trick. Perhaps they will write they cannot be evicted if you accept a partial payment, and that you must accept all payments. Then, once you realize you are in for a court fight to evice, they low-ball a new deal that they also write up, and you get in deeper.
Good advice -thanks, all. Like I said earlier, I don’t know much about rent-to-own, but it doesn’t sound great to me. I’ll see if I can hunt down more information for my mom. The last thing she needs right now is a big hassle with tenants/buyers.