There are two main reasons why landlords offer tenants a Lease/Option on rental houses: They want higher rents, but don’t necessarily want to sell their house; or they do want to sell their house and want to give the occupant a chance to either clear up bad credit scores, or save up a down payment, or earn some kind of rental credit attributable to rents paid or improvements made.
Of course there are other reasons too. In many areas, when a tenant signs a net lease which requires him to make mortgage payments as well as to pay taxes, insurance, and maintenance; and this is coupled with an Option to buy, he is deemed by the tax code and State law to be buying the house as a purchaser under contract. He can have an insurable interest in the house along with the owner and build equity just like the owner. The owner motivates the tenant to do all these things by virtue of the fact that the occupant is improving his own living quarters and building equity without actually having to qualify for or be liable for a large mortgage. When he sells, he can capture his profit just like any other home owner tax-free.
The good news is that the owner thus rids himself of almost all management and operating expenses in return for giving up future profit. The bad news is that, unless there are special equity sharing provisions in the Lease/Option, he has also given up all future increases in value during the period of the lease.
For those landlords who rent out low-income properties, maintenance is a constant drain on cash flow. An interesting feature of a Rent-to-Own contract is that the occupant is considered to be a homeowner by building inspectors. For some reason in many areas, building inspectors hold homeowners to a much lower standard than they do landlords, so houses that are rented can cost many times as much to maintain as houses being “sold” on a Rent-to-Own Program.
When the smoke clears, just about as many of the occupants under Rent-to-Own programs move out without completing their purchase as those with Lease/Options so the landlord winds up with higher net cash flow.
