Lease-option, Rent to own. What does it all mean to a seller?

I did an article for buyers, but is this a very good option for sellers?!? Generally the way a deal works, is that the buyer pays a down payment, rents/leases the home for up to 3 years, and then they have a balloon payment due(rest of the balance). So if a home was 100k, they put 3k down, and make payments for a year, then at the end of the year, they get a loan for 97k+closing costs. Now this could change based off whether or not extra monies are escrowed during the lease, whether you are helping to pay for repairs, etc.

All of the below items of consideration would need to be detailed in the contract(s) you write up with the potential buyer. Get with a tax consultant, and lawyer,etc to make sure you and the buyer are covered.

• Generally you get a bit of cash up front, which is non-refundable. ie.- they pay you 3k up front, and at the end of the lease/rental term, if they decide to not buy, you get to keep the 3k. If they decide to buy the property at the end of the term, you credit them this amount towards their purchase price. Note: you don’t generally have to pay taxes on this money(gain) until the actual closing.
• You get to claim depreciation on the property while they are renting. Talk with a tax consultant, but generally you take the value of the property subtract the land value, and divide by 27.5(years).. the amount calculated is what you can deduct on your taxes. House is worth 250k –  land worth  25k equals 225k, divided by 27.5 equals $8181.82 per year.. and if you are in the 35% tax bracket you saved an additional $2863.64 that year(15% tax bracket = $1227.28)…
• You can write the contract with a non-refundable escrow for the buyers. i.e.-they pay an extra 100 per month, 1 year later, they get $1200 towards downpayment when they go to buy, but if they decide to not buy, then you get to keep the cash(depends on how contract is written).
• You still have to make your payments(if you have a mortgage), pay your taxes(if your buyer isn’t specified to pay them), pay some insurance(structure), etc until the buyer closes on the home. Again, depends on how contract(s) is/are written.
• Depending on how you work the deal, the buyer generally pays for maintenance or repairs, etc. Becareful though, if something goes wrong, the buyer may not have the money to fix it, and it could become a bigger issue down the road.
• You will need to verify your tenant/buyers, or hire a property management company to do it for you. If your deal states you will provide maintenance, and you want property management company to handle it for you, then you will generally pay a fee per month. I generally charge first months rent to find/qualify a tenant, and 10% per month to handle maintenance.
• If home needs repairs, and the buyer completes them. You might get to keep the improvements at the end of the term, if they decide to not exercise their option on the home. Again, depends on how contract(s) is/are written.
• If you have a mortgage on the home, it will still show up on your credit report and affect your debt to earning ration during the term. Check with lenders, the ones I use on Indianapolis Real Estate deals, generally will take your rent/lease contract into consideration at 75% of rent. so if buyer is paying you $1000 p/month in rent, then bank will consider that as $750.00 p/month extra income. This would help your debt to earning ration for buying a different home.

There are a lot of things to consider, but in this market, a lease-option/rent to own, is a very definite option for some sellers who need to sell a home.  Check with professionals to make sure your interests are coveredd.