In this video, you will get answers to these questions:
- Are rent to own homes a good deal?
- Should you as a tenant consider renting to own?
- Should you as a landlord offer this option to your tenants?
- Where do problems arise in a rent to own agreement?
Are rent-to-own homes a good deal? I’m Aaron Hall, a business attorney in Minneapolis, Minnesota. You might be wondering about rent-to-own homes. Are they a good deal? Should you as a tenant do it? Should you as a landlord offer rent-to-own? Let’s talk about those issues today. Again, I’m Aaron Hall. I’m an attorney representing business owners in Minneapolis, Minnesota. You can learn more about me at aaronhall.com. All right, let’s set it up. Imagine you’re a tenant and you see a couple of different offers out there. Two apartments or let’s say townhomes. Two townhomes that you like. One is $1,000 a month. The other one’s $1,000 a month, but one of them has a rent-to-own option. Wow, wouldn’t that be cool? Doesn’t that sound great? You can rent for a number of years and then you’ll be getting a credit with your rent payments to now own the home.
Sounds like a great deal. But unfortunately often, the devil’s in the details. Let’s talk about how this works and then I’ll explain where the problems arise. Let’s say you’re paying $1,000 a month, and under the rent-to-own agreement, $100 per month is applied to the purchase price should you decide to buy it in the future. All right, so let’s keep the math simple. You rent for 10 years. That is 120 months. If you apply $100 per month, that’s $12,000. By paying $1,000 a month for 10 years with $100 each month applied to the purchase option, then after 10 years you have $12,000 set aside as applied to the purchase option. Sounds like a good deal. You feel like, “You know what? It may not be as good as building equity in your own home, but it feels little bit like it’s that same approach.” Here’s the problem. Usually in a rent-to-own arrangement, the seller or the homeowner doesn’t have to sell at any point. You simply have the option to buy if the seller decides to sell. That’s the first issue. The seller can decide or the homeowner can decide whether to sell and when. Second, and here’s the bigger problem, the homeowner can decide what price to sell at. Okay, so hypothetically, let’s just say this home that you’ve been renting is worth $100,000 in the market. What’s to stop the homeowner from deciding to sell it for $110,000? Nothing first off, that’s very typical. Let’s say the homeowner comes in at $110,000, but you get that $12,000 credit. Thus, you’re able to buy the home at $98,000. You’re still saving $2,000 in this hypothetical, but it’s not saving the $12,000 that you thought. And that’s where the problem is.
The homeowner can decide to sell the home at whatever price point they want, typically with how these are set up. And so in a rent-to-own arrangement, even though you have a hundred dollars applying to the purchase price, if the homeowner can control the purchase price, what good is it? The homeowner could say, “The home is going to sell for $112,000.” And now you have to decide do I want to pay $112,000 and after your $12,000 credit, you’re actually just paying $100,000 which is the fair market value of the home. You can see the games that are played and that’s why in my mind, rent-to-own is kind of a gimmick that is used by homeowners or rental management companies to try to get tenants who don’t understand the issues that you now know because you watched this video trying to get them
This is a trick to get people to say, “Oh, I like that rent-to-own option. I would like the option of maybe owning someday,” when in reality it’s virtually meaningless. As the old Latin phrases, caveat emptor, buyer beware. And in this case tenant beware. Rent-to-own agreements, they can be written all different ways, but this is the type that I’ve seen. This type isn’t good. Now, maybe you can have an agreement regarding what the value of the home is or how it’s going to be appraised and then you get credit. That at least takes away the issue of the homeowner inflating the price to offset the credits that you’re owed. That answers the question of whether it’s a good deal for tenants. I’d say the majority of rent-to-own agreements I’ve seen are not a good deal, but it doesn’t mean all of them are a bad deal. What about for homeowners? Is it a good idea to do this?
Well, for the most part, there’s no harm with homeowners. If you offer rent-to-own arrangement like this, you’ve reserved all the power. First off, you can decide whether to sell or not. And then second, when you do sell, you can set the price, so at the end of the day you’ve reserved most of the bargaining leverage. The only real question is, “Is there significant value in offering a rent-to-own option to prospective tenants?” In other words, are you more likely to find some tenants if you offer this? Now, some tenants may not care about it, but with other tenants, like with the hypothetical we talked about, it could be that as they’re weighing different options, this rent-to-own option is significant and is the factor that causes them to decide. “Yeah, I do want to rent this home because I want the ability to own it someday in the future.”
Currently, rent-to-own is permitted in Minnesota as long as it’s not a violation of the usury laws. Usury laws are statutes that say you can’t charge over a certain interest rate to people. And so you have to look at the effective interest rate with a rent-to-own contract and just make sure that it isn’t going to implicate the Minnesota usury laws. Here we are in 2020, as of the date of this recording, rent-to-own agreements for homes in Minnesota are legal. I’m Aaron Hall, business attorney in Minneapolis. If you have questions about this, feel free to leave them in the comment section below. Also, in the description below is an important disclaimer and also a link to other resources on aaronhall.com. And if you’re interested in other educational videos like this, feel free to subscribe to this channel.