Renting vs Owner Financing in a Soft Market
If the sellers can’t get their home sold they will often consider renting it. That way they get some money coming in to help with their payments. They have probably also heard you can make money renting property, and get lots of tax deductions. In some markets they will also be approached with offers to lease/option the property, which is really just another form of rental.
I know from expensive personal experience the decision to rent creates much larger risks that are apparent to those who have not been in the rental business before. Renting, if not taken seriously and treated as a business, is a serious threat to your financial health.
If you are considering renting because you can’t sell you are already in a market where you are competing with other sellers who have polished their homes to show as well as possible. There won’t be any chipped paint, soiled carpet, dirty windows or any other issues which might turn off a prospective buyer.
When you rent your house the renter will not have the same standards you do. In addition, your moving out and their moving is will inevitably cause some damage. An appliance will dent a corner bead and chip the paint. The carpets will get snagged on something, etc. If the tenant doesen’t have the same standards of cleanliness you do (they won’t) they can easily reduce the value of the home by 20% in six months! Hard to believe, but true.
There is an old saying in the rental property business “Compared to a bad tenant, a vacancy is a delight.” You better believe it’s true!
Don’t get me wrong, rental property can be a terriffic investment and rentals have created a lot of wealth. However, I think they seldom do that for folks who were dragged into the rental business because of financial desperation in a soft housing market.
{ 2 comments… read them below or add one }
I am relocating and need to sell/ lease my home. I decided to go with the lease option after reading the information on your site. I am confused about the whole owner finance /terms. I owe over the maket value 127000 but several homes in the area are renting at 1200 and are bigger then my home but my payment is 1180. What can I do to get enought to cover my mortgage and be able to rent my home quickly?
From what you describe, I don’t think you can make it work. I also think doing a lease/option in these circumstances could end up costing you a lot of money and trouble.
Consider:
1. It sounds like a potential renter/buyer can find a larger home for an additional $20/mo. In that case why would they want yours? If $20 make a difference, you can be sure you don’t want them!
2. Are there houses available that could be purchased for market value or less? If so, yours is not a good deal and the strongest prospects will not be interested.
3. Is there any chance your home might need significant repairs during the lease period. If the entire monthly rental is going to the mortgage there is no buffer left for unexpected expenses.
4. If the buyer/renter can’t/won’t pay one or more months can you handle the payments until you get them evicted and the house re-rented or sold? You will be working long distance, so that will add to the difficulty.
5. It is really easy for a house that is ready to be rented to need thousands of dollars of fix up work before it would ready to sell. The other side of that is if your house is in “ready to sell” condition a renter can reduce it’s value by thousands of dollars very quickly. Carpet stains, the smell of smoke, etc. will bring the value down quickly.
I would strongly suggest you spend the money to talk with a local real estate attorney about the pros/cons of defaulting on the loan and/or a short sale. It’s kind of like removing a band-aid; pull it off quickly to get it over with, or pull it off slowly to spread out the pain. Unfortunately, it’s going to hurt either way.
Best of luck with whatever you decide.