Real Estate Articles

Rent to Own

Written by Brent Pace for Gaebler Ventures

Looking to purchase some real estate, but can't get financing? Don't worry; renting to own is another option you can explore.

Many up and coming entrepreneurial businesses are looking for space right now.

With the rest of the country in a recession, it seems like a good time to take some risks and get your business established. Unfortunately, purchasing real estate right now can be difficult. One of the main barriers for entrepreneurs in purchasing real estate for their business is the lack of credit history. But don't fret, you still have another option that many sellers may be interested in: the rent to own option.

Rent to Own Explained

The rent to own option, when executed properly, is actually quite similar to what happens when you lease a car. Someone is selling real estate, and you want to purchase it. However, due to either credit or financing issues, you are unable to execute the purchase. Instead, the seller may allow you to enter into a contract where you lease the property for a time and then have the option to buy it outright. The contract you enter into has a few important terms that must be defined. These terms include the rental payment amount, the rental term, and the buyout.

Rental Payments

The rental payment amount is simply the monthly payment that you, as the renter, will pay to the owner. Figuring this out can be tricky, but the payment amount will likely end up being somewhere between what you would pay on a mortgage as an owner, and what the rental amount would be if you were entering a straight lease deal.

Rental Term

The rental term is highly negotiable and depends a lot on the reason why the property wasn't purchased in the first place. If you were unable to purchase the product due to poor credit, making payments on the property for a few years will help you establish that credit. If you were unable to purchase the property due to the financial crisis and a lack of available capital, you will need to wait a few months or years until credit loosens up again. Either way, a few years of making successful lease payments to the owner of the property will give everyone involved in the deal, including the financing partner, the opportunity to get comfortable with the situation.

The Buyout

Just like when you are leasing a car, the end of the rental period will have a buyout option. At the time you sign your rental agreement, you will negotiate a buyout price with the owner. Typically this price will reflect the fact that you have made several payments by the time the buyout option is available. Thus, the price will be slightly lower at that point than it would be otherwise. Either way, the price represents the price at which you, the potential buyer, can exercise your option and purchase the property.

Good to Have Options

Although you'd probably like to own your space, it's good to have options. Renting to own is essentially leasing with a callable option. Make good use of the option and be sure to do some market research as the date nears to help you make the right decision.

Brent Pace is currently an MBA candidate at University of California at Berkeley. Originally from Salt Lake City, Brent's experience is in commercial real estate development and management. Brent will have tips for small business owners as they negotiate their real estate needs.

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