Are you trying to figure out the difference between rent-to-own and lease options? Maybe you have no idea which one is best for you. Today I want to unpack both to give you the answers you need.
Rent-to-Own or Lease Options: Which is Best?
I want to break it down and discuss the details of these two ideas. They both have their pros and cons, so let’s get to it.
The most important thing that you need to know is that rent-to-own and lease options at their most basic place are kind of the same thing. For both of them, you make payments to go towards purchasing a property. In the same way, owner financing does this because you make monthly payments going towards the purchase of a property.
The biggest difference between them is the specific words that we use when we talk about each of them. To keep it simple, I have explained rent-to-own in terms people understand. Think about places that offer rent-to-own to buy an appliance for your house. Maybe you need a new refrigerator, oven, furniture, or even a tv. You can rent-to-own all of them.
In order to do this, you usually need to put one month’s worth of the payment down and then start making monthly payments until it is paid off. On top of that, you are also charged a high-interest rate since you are basically borrowing money from them in order to use the products now to pay for it in a year or two.
This is how rent-to-own works in a retail sense. But, it’s a bit different for real estate.
I don’t do lease options like this. When I put out my bandit signs and am looking for houses or renters, I advertise it for “rent-to-own,” so I know it gets confusing. I have had a lot of potential buyers respond to my sign thinking that they just need to give me a month’s payment, a security deposit, and then pay me off in 30 years or so. But, that is not how it works with real estate, so I have to explain to them that things work differently for rent-to-own with real estate.
Basically everything is different for rent-to-own once you involve houses. It’s a whole new world. The rules are different, and so are the words. Just, everything.
I explain to my potential buyers that in real estate a rent-to-own contract is basically a lease option. They are the same. With lease options, the potential buyers need to put a large amount of money down at the beginning, known as the option fee. This means that they get the option to buy the house in the next year or two, etc.
Every month while they live there they will pay rent. This is where the lease in lease option comes in. They have to lease the property with monthly lease payments to lease option the property for a few years.
That is the biggest difference between rent-to-own and lease options.
In both situations, you need to know what the total cost is for the purchase. I tell everybody that “this is the price of the property. You could go get a mortgage for it right now. Please do!” But, the reality is that not everyone is in a position to be able to get a mortgage. They can, though, work towards paying it off over time. This is why a lease option can be an awesome opportunity for them!
Another thing to keep in mind, though, is that the money works differently between a rent-to-own and a lease option. Remember how I talked about the high-interest rate you pay with rent-to-own purchases? Well, I don’t charge interest for my lease options. In fact, a certain chunk of their monthly payments is gradually paying down the purchase price of the house.
So, when they go get their mortgage at the end of their lease time, they have a mortgage for a lower amount than when they started. Sometimes I even give them part of their option fee towards the purchase price.
It all depends on the agreement we determined when we made the deal at the beginning.
And it depends on if they actually get the mortgage and buy the house within the time we set. Out of 70+ deals I have done, only two people actually got their mortgage. In fact, I just found out that I am going to get back one house for the third time now.
While rent-to-own has an interest rate, my lease options do not.
Usually, when you buy the washer/dryer set from the store, let’s say for $2000, they add on that interest rate and you pay closer to $3000 or more overall. When I do my lease options, by the time we get to close the buyer owes way less than when we started. Let’s say the purchase price is $150,000. After a few years where part of the monthly rent pays down the total, the seller will likely owe closer to $145,000 or so at the close.
Do you see how great a deal lease options are for buyers?
So, those are the basic differences between rent-to-own and lease options. The reason I advertise with the words rent-to-own is that it is an idea that most people understand, even if it is not 100% accurate for real estate. The majority of people have never even heard of a lease option. So, when I advertise for houses, y’all, I try to use words that the bulk of the majority will understand.
If I advertised that I have a lease option, my phone just does not ring. People just have no idea what that is. My ladies have tried saying lease option, too, and we all get crickets. Seriously, 100% of the time the phrase “rent-to-own” gets the phone to ring and people interested way more often.
Now, the paperwork says lease option; specifically a “lease with option to purchase real property.” What a mouthful. The paperwork does not say anything about rent-to-own. We just advertise that way since they are basically the same idea.
It all boils down to the contract and what the contract says, which is “lease with option to purchase real property.” And this is what I give to my ladies in First Deal Done Fast so that they have the same contract I use and can get their deals closed super duper fast. I want them to be set up right from the start.
Alright. Got it?
Feel like you have a grasp of rent-to-own vs. lease options?
If you still want to learn more about rent-to-own, lease options, or anything else about becoming a new real estate investor, make sure you join us over on the FREE Facebook group for our ladies! We’d love to see you there. Check it out now.
No matter what words you need to use, make sure you always say it in a way so that your buyer has an idea of what you offer. Try to use language that everyone understands and then explain more whenever needed. You got this! Now, go get those deals!