Yesterday I received an email from a buyer interested in one of the homes that I currently have listed for sale.  He asked if the sellers would be willing to offer seller financing and give him a credit for 25% of his monthly payments?

He is probably confused about the definition of Rent to Own/Lease Option and Seller Financing.

So I thought I would take a stab at explaining the difference.

Let me start with Seller Financing.

Seller Financing is when you buy a home and instead of going out and getting a loan from your local bank, mortgage company, credit union, etc., you get the seller to finance the purchase of the home by their agreeing to a note instead of receiving cash for selling the home.

For example, let’s say that you buy a home for $200,000. (Note that I used the term ‘buy’)  The seller is willing to carry a note for 5 years at 6% for 90% of the purchase price.  That means that instead of borrowing the 90% ($180,000) from a bank you would be borrowing the money from the seller.

What does that mean?  Well, you’ll make a monthly payment to the seller for 5 years.  Let’s assume that the seller wants the loan to amortize.  Since a typical real estate loan amortizes over 30 years I’ll use that to figure out that the monthly (principal and interest) payment would be $1,079.19.    The balance you would refinance in 5 years would be $167,497.84.  That means that $12,502.16 of your 5 years worth of payments went towards paying down the loan balance.

In addition to paying principal and interest, you would also be responsible for paying the property taxes and carrying insurance on the property.

You might be asking yourself, why would you buy a home this way.  Well, it’s easier to qualify for the loan.  The ‘underwriting’ that a seller will put you through is a lot less stressful compared to what a bank would put you through.  And, you become the owner of record of the home.  You’re no longer paying RENT!

Now a little bit about Rent to Own/Lease Option.  These terms mean the same thing.

When you Rent to Own a home you are still renting as the ownership doesn’t change hands.  A typical Rent to Own transaction consists of you giving the seller an “option deposit”.  This option deposit gives you a contractual right to purchase the home at some future date and at a specified price.  The way that you get your deposit back is by exercising your option to buy the home as agreed.  If you don’t buy the home, you lose your deposit.

In addition to receiving a credit for the option deposit when you buy the home, you usually can get the seller to agree to give a credit for each month that you pay the rent on time.  For example, if the monthly rent is $1,200, you probably can get the seller to give you a $100 – $150 per month credit for each month that you pay the rent on time.  That turns out to be a win/win for both you and the seller as they receive your rent on time and you build up equity.

When you Rent to Own a home, you don’t become the owner of the home.  So the Seller still pays the property taxes and carries insurance on the property.  I would recommend that you carry renter’s insurance to cover your contents as the sellers’ insurance policy usually doesn’t cover your stuff.

I can help you find sellers willing to Rent to Own or offer Seller Financing.