Sean,
If you do find someone to buy via the rent-to-own route, please make it clear to any attorney involved that you need a "Land Contract" written. I would actually consult with a mortgage broker on this from your area. The broker should be able to tell you what elements are necessary for a valid contract in a lender's eyes. Lenders are a funny bunch, and the wording of a Land Contract is slightly different and many lenders will not look at it by any other title.
Basically, the best way is as someone else said, to collect an upfront downpayment amount, so they have some immediate equity in the property, and a vested interest in completing the contract. Then you establish a selling price, for which they can buy the property and complete the contract at any time prior to the expiration of the contract. Based on that selling price, you develop an amortization table which tells how much of their monthly payment goes toward principal reduction. At the time that they obtain a mortgage to complete the contract, their upfront downpayment and all monthly principal reductions added together will be looked at as a downpayment amount. For example, if the set selling price was $100,000 and they gave you $3000 downpayment and their principal reductions totalled another $1000 over 2 years, they now have $4000 downpayment to show a lender. In this case, if they needed 10% down by the lender's requirement, they would only need to come up with $6000 more downpayment to close on the home. VERY IMPORTANT: THEY MUST MAKE ALL PAYMENTS, INCLUDING THEIR MONTHLY PAYMENTS, BY CHECK. The lender will request copies of the cancel checks for every payment they say they made. No checks and they won't get their mortgage. That has been the single biggest problem with this type of transaction that I have seen. Too many people enter into these contracts without being educated in them, and they don't know to make payments by check. They think that a receipt from you is okay, but you are obviously an interested party in this transaction.
Remember that you are setting a price that is good for them throughout the contract period. If the house goes up in value during the contract period, they have locked in a good price and you can't change your price when that value goes up. It's actually a great way for a renter to speculate and end up with a bargain down the road. For example, you set a $100,000 price on the home that is good for the 5 year contract period. In 4 years, the price of homes in the neighborhood has now gone up to $200,000 and they are still able to buy it from you for $100,000. Now there's some incentive for someone to find a way to get a loan. If they don't get a loan by the expiration of the contract, they are gone and you now have a $200,000 home to sell. Remember also that you want the contract to state that NONE of their payments are refundable, neither upfront or monthly. I would also include in the contract that they are responsible for all maintenance, and all taxes on the property. Remember, the essence of this deal is that you are actually the one providing a mortgage to them, but have required a smaller downpayment, or in other words you have given them a short-term mortgage with a balloon payment due at the end, which must be replaced by a "real" mortgage by contract expiration. If they do not find a mortgage, or a whole bunch of cash, they have defaulted on their mortgage with you and you will take the property back.
I have dealt with MANY of these and the fact is that most of them do not come to fruition, for a wide variety of reasons. A large number of those are due to them still not being able to obtain their own financing by the expiration of the contract. If they will allow you, I would get the renters/buyers to authorize you to talk to their mortgage broker, or meet with him/her along with the renters/buyers to find out why they can't get a mortgage. Maybe they just haven't been at their new, great jobs long enough to qualify for the loan, or maybe they are just deadbeats that never pay any of their bills. There are many reasons why someone can't get a mortage. They may have one large, bad account that is holding their credit score down and they may qualify after settling up that account and getting their score back up over a short period. If you get the opportunity to see their credit report, have the broker explain the entries to you. That can tell you a tremendous amount about the probability that you will ever see a sale go through. If you end up putting it back on the market, you have just been in an ordinary landlord situation, you've gotten rent payments to cover your payments on the home, and hopefully they didn't trash the place and hopefully the value has gone up and you can laugh at them for being stupid enough to let the place slip through their hands.
Sean, hopefully I summarized this well enough to understand, but if there are any questions on it, let me know. I haven't covered every possible scenario, but I am very familiar with most of whatever could arise, as I have experience with lots and lots of these.
Dave
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Topic: Way off Topic - but looking for help: Rent To Own question... (Read 1494 times)