“What Is Rent Credit Vs Rent To Own?” written by Mike Marko
Have you considered offering rent to own to your tenants?
As your property management business develops you are often introduced to new ways tenants can pay their rent. Are you familiar with nonrefundable rent credit? and what it does and how it can affect your property rent to own sales?
Today I will be explaining and detailing rent credits as they relate to rent to own and the benefits of using them in your property management business.
What Is A Rent Credit?
The rent credit we will be detailing is the credit used to leverage the tenant into completing a rent to own option on the rental property they are living in. (Although the traditional definition of rent credit is that it’s tax deductible credits that are offered on rental properties.)
However, before we start, let’s have a little discussion about rent to own or lease option.
There are many scenarios that can influence a property management firm to do rent to own on their rental properties. One reason the rent to own contract is offered because the property manager’s business is not doing well. The business could be facing bankruptcy, overrun on costs and finding it difficult to keep profits ahead of costs. Sometimes the owner of the property needs a cheap way to get rid of a property. In doing a rent to own you wouldn’t have to pay agent fees as the contract is between you and the seller. The tenant will take ownership of the property and treat it like their own until the contract completes and it actually turns over to them legally. This could cut repair costs, upgrade costs, and other costs due to the tenant own the property instead of just renting.
When a property is set for rent to own, its tenant has a choice to buy it at a certain price. The tenant and the property manager should have mutual understanding and good relationship in order to close this deal but according to the law, a property could be bought as long as the tenant is renting it. In this scenario, a rent credit can be offered.
The rent credit is normally a negotiated discount if the tenant pays their rent/property purchase fees on time during the contract. A rent credit could be a portion of the tenant’s rent. For example, a tenant is paying $1,550 per month then a negotiated $250 of it will go through the settled rental credit or a discount against the final cost of the properties purchased.
Can A Tenant Refund A Rent Credit?
Since the rent credit is a discount offered to entice the renter to pay on time and complete the purchase, there are no refund rent credits… but it’s sometimes negotiable.
Most experienced landlords or property owners usually play with numbers in order to get the best possible deal from the tenant. Property managers often sell their properties for a reasonable and affordable price in order to convince their tenant in buying it.
Offering a discount or rent credit on the final price is an option many property managers use to entice the tenants to complete the sale early or on time according to their purchase agreement. So since the discount is part of the payment the tenant makes toward the property, the normal rent to own contract will be written that that discount will be lost if the renter does not complete the rent to own contract.
How About Late Payments?
Normally a rent credit in the lease to own is not given any month that the renter pays their rent late. A rent credit is not counted in every delayed payment. Most lease option agreements dissolve the rent to own agreement if the tenant fails in paying rent on time.
When entering into a lease to own agreement make sure that your lawyer reviews the agreement and that you and the tenant understand the contract completely.
How To Get A Rent To Own Option?
If the property manager offered a rent to own option to its tenant, their agreement will be written and it will serve as a legal contract. Their agreement will include the length and amount of the deal.
- First, the property manager and the tenant should both agree on how long the deal will last. Usually, the tenant should spend one to three years on renting the property they will be purchasing.
- In a rent to own agreement, the tenant will usually pay a higher rent because some of it will be considered as a part of the rent credit or discount against the final selling price.
- When the contract ends, the tenant could finally buy the property at the agreed price.
Things That Will Be Discussed In Rent To Own Contract
- The length of the lease period.
- Rent amount.
- Rent credit for down payment and how it will be held until the time of purchase. Both sides should discuss the possibility of breach of contract.
- Who will pay property taxes, insurance, and homeowner fees during the lease period?
- Who will pay for utilities, maintenance, and repairs during the lease period?
Is It Wise To Give A Rent To Own Option?
Both sides will get a benefit from their agreement. Since the property is already bought, it will lessen the tenant’s expenses. While on the other side, the property manager just avoided bankruptcy or cut their costs significantly when selling the property.
Be Cautious On Your Decisions About The Rent To Own Option And Its Rent Credits
A lot of things could happen in the span of two to three years. Life takes twists and turns so it is best to have a rent to own contract made up by your real estate lawyer to avoid any pitfalls or misunderstandings. There are numerous things that could happen during your contract with the tenant and one of those is a breach of contract.
Breach of a contract could cause several lawsuits and that is one of the reasons why both sides should discuss several topics.
- Rent Credit – One of the topics that should be discussed is about the rent credit. Could the rent credit be refunded if the tenant decides to back out?
Though most property managers don’t consider refundable rent credit, it is better to weigh the situation with your tenant. It is advisable to choose a decision where both sides could have benefits.
- Responsibility – Natural disasters and human errors could happen at any time of the day. What would happen if something bad happens to the property?
In a rent to own contract, the property manager still owns the property while the tenant is paying for it. In most cases, the property manager will be responsible for fixing the property if it is damaged by a natural disaster. However, if the damage is caused by the tenant, the tenant is the one who’s responsible for fixing it.
In cases like death or other unforeseen events, it is advisable to discuss it personally and who will carry on the agreement for both sides.
In any case, make sure your contract covers these points and is approved by both the buyer and seller of the property to avoid any unnecessary legal actions.
Final Thoughts About Rent-To-Own and Rent Credit
I expect this article gave you enough knowledge about rent to own option and rent credit to make your own decisions about rent credits. In order to avoid any misunderstandings to the agreement, it’s advisable to have a lawyer while making the contract.
If you have questions or suggestions, leave it in the comments below.
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