A rent to own transaction has more to do with managing people just as it is about profit realization. Managing expectations and performing due diligence in this kind of transaction is of great importance. The landlord/ investor and the buyer/ tenant must be exceptionally clear of exactly what is in the deal for them and know that they are taking a risk in order for them to reap the rewards. The probability of both parties involved enjoying a successful outcome is increased when the transaction is built on a clear foundation and certified financial analysts are consulted when creating a financial plan where they give their financial advice.
The consulting financial firm and the investor have a responsibility of qualifying a RTO applicant properly and the agreement being structured in a way that all the risks involved for all parties are identified such as:
- What will happen in case the buyer is unable to purchase the property when the term comes to an end?
- What happens in case the property’s market value increases or declines when the term comes to an end?
- What obligations do the investor has during the period of holding that will ensure the property is adequately protected and which are the limitations of the investor on this?
The best defense that an investor can have is doing a proper due diligence together with making plans based on verifiable, reasonable projections and also being discriminative when accepting a buyer/ tenant. Both parties need to have a clear knowledge about their responsibilities in the deal, the opportunity cost, the inherent risks and must consult their legal and financial advisors before they sign the final agreement. As an investor, it is important that you do business only with buyers/ tenants whose actual circumstances have been diagnosed and analyzed thoroughly by a qualified mortgage professional.
Also, the buyer/ tenant should agree to be coached by a certified financial planner and also continue with the coaching during their tenancy period just to ensure that they are always on track and the investor should be notified of any setbacks. A majority of RTO applicants usually face some extenuating financial and/ or life circumstances that makes them unable to purchase a home through conventional means. Such include not having saved enough full down payments for buying a house; they have been via a divorce, bankruptcy, loss of a job or even death of a spouse which significantly affects their credit rating. Some are self employed persons or could be going through a financial crisis and are looking for a creative solution to ensure that they don’t loose their home.
Regardless of the case, an investor needs to have a good understanding of the buyer’s finances and should vet all the aspects of the deal to ensure a sound transaction. Certain expenses like out of pocket expenses and closing costs are usually not included in the proposed deal and it is thus very important to have a good understanding o the operational and upfront costs as this can significantly dilute promised returns. A rent to own buyer/ tenant should opt to deal with a landlord/ investor who is experienced, credible and is financially stable to cover all the financial costs of the transaction during the holding period. Some investors do not have the experience and knowledge to structure a proper RTO deal.
Opting to work with a company that has a good visibility in the community and who can provide the references is very crucial. A rent to own agreement is a financial agreement that needs to be structured well with both parties keeping in mind a win/ win outcome. A well balanced transaction guarantees a high potential for realizing both the emotional and financial rewards that results from a well crafted rent to own deal.