To make this simple lets say theoretically I have a house I want to rent for a year with the option to buy. The House needs some work but nothing major regarding the roof, foundation, etc. I want to buy the house for 250k and pay X amount for rent a month. While I am living in the house I do some upgrades (kitchen, hardwood floors, etc). After one year the house appraises for 350k. If I have the option to buy at 250k and the house is now worth 350k does that mean I have 100k instant equality (minus the repair bills) and do not need to have a down payment? Or will I have to still come up with the 20% down on the 250k?
I know I can use some of the rent to go towards the down payment. Are there any other tips for someone interested in a rent to own contract on a fixer upper house?
First, be advised it is risky to make repairs on a house you don’t own. If you don’t exercise your option, or if you try and are unable to get financing, you are out the money and time spent. And in today’s lending environment, getting financing is far from a sure thing.
With that said, your price is locked in at $250K. So whatever appreciation occurs during the lease agreement is your’s.
To take advantage of that, though, you need to be able to qualify and take title, or sell it prior to the expiration of your agreement, and pocket the difference between what you owe the homeowner and what you receive from your buyer.
I specialize in rent to own. You may want to try to get an option for a longer period, say 3-5 years. Just to have some cushion if you need it. As far as getting it financed, if it is worth 350k when you buy, you should be able to find a lender who will finance at 70% or 80% LTV, with no down payment. At 70% LTV, (loan to value ratio) you could borrow $245k. At 80% you could borrow $280k and pocket $30k.