Expert: Dick Dennis - 12/8/2010

Question
We bought a house in MD for $280,000 plus closing fee 5 years ago.  We put a huge downpayment, so we have $40,000 left for our mortgage.  We are not going back there another 3 years or so.  My husband is in navy and he will retire in 3 years now.  We are planning to buy bigger house in MD then.  We rent our house out for $1300 which is below our mortgage and market around there for 3 bedroom.  The lease will be due to renewal in a couple month and the tenant ask us if we are interested in letting them rent to own.   Is it a good option or we should pay off our mortgage and sell it and buy another house in the future?  I thought it might be a good idea since the current housing market is low, however we aren't hurry to see it.  If we decide to let it rent to own, how much should we charge for a rent a month and selling price and the term?   Please give us advise.

Answer
First thing you have to realize, Tomomi, is that chances are the price you would sell the house for would be substantially less than what you paid for it five years ago. I would suggest you contacting a good, knowledgeable Realtor near where the house is located and get an idea the present-day value of the home.

But it is a good thing that you have mortgage payments based on a very low mortgage balance, so it would be easier for you to execute a rent-to-own, or lease-option in (hopefully) selling your property.

I say "hopefully" because just because the buyer/tenant has a rent-to-own or lease-option contract, it does not necessarily mean he would continue to actually close on a sale.

With all that in mind, Tomomi, the advice I would give you is to first get an earnest-money, NON-RETURNABLE deposit to execute the contract. Your husband should contact the navy JAG to help in putting that contract together properly.

The amount you should get as a monthly payment should equal the amount of your mortgage PLUS a reasonable rent figure of which an agreeable amount would be to the credit of the tenant/buyer. The contract would stipulate that the tenant/buyer may maintain and improve the condition of the property at his cost.

At the end of, say, three years (that is customary), the buyer/tenant must complete the purchase of the house in whatever manner is proper and legal (usually getting a loan from a bank or other lender).

If the tenant/buyer for any reason does not complete the purchase of the property at the end of the agreed-upon time, he LOSES his deposit and the monthly credit he was amassing over the three years and he must vacate the property.

Now here is where a good, knowledgeable Realtor comes in. This person, who most likely would "keep an eye" on the property for you (in other words would act in place of you for any reason), would periodically advise you as to the on-going condition and value of the property. You would be paying a reasonable fee each month to this person for his professional service.

If the JAG should put together the contract with help from a REAL ESTATE attorney in Maryland, you could also have that attorney keep any money that is due you in his/her trust account on your behalf. A fee may be charged in this case, too. The Realtor also has a trust account, so you could use that one, instead, if you wish.

At this point, Tomomi, this letter has become pretty long. A lease/option or rent-to-own contract is pretty long to explain here in this email. Yes, there is lots more to it. If you have any more questions regarding your situation, you may contact me via email at the bottom of this page. I might be able to put you in contact with a good Realtor in MD. I do wish you well.

Dick Dennis
California Real Estate Broker Lic. #00349415
dixiedee13@aol.com