Guttentag offers a
checklist of issues
for buyers and sellers to negotiate. The calculator allows the owner to determine whether the deal is profitable enough, and, since the profit comes from the renter, sheds light on the expense the renter would bear above the cost of an ordinary rental.
To start, the owner establishes an acceptable rate of return on the equity in the home, which is the difference between the home's value and the balance of any mortgage or home equity loan on the property.
An owner would typically demand a return comparing favorably with what could be earned on another investment, such as a mutual fund, if the equity were freed up by by an immediate sale. The return comes from the option premium, rent credit and the difference between the sales price specified in the deal and the lower price the owner could get immediately.
Guttentag provides an example in which the owner requires a 10% return over 12 months on a home worth $100,000 with equity of $40,000. Keeping the home over the next 12 months would cost $610 per month in mortgage payment and other expenses.
The example shows three ways to get the 10% return: An option premium of $1,000, rent of $610 and price of $100,660; a $1,000 premium, $501 in rent, $102,000 price; or a $654 premium, $610 rent, $101,000 price. In addition to these income sources, the return includes the gain in equity as the outstanding mortgage balance is reduced by the 12 months of mortgage payments covered by the rent.
Rent-to-own is not for everyone. But can be a good option for the seller who can't get the desired price right away and for the prospective buyer who has found a suitable home but needs time to get his financial house in order.