Screening Tenants for Rent-to-Own- By: Karim El Sheikh
Rent to own properties are becoming very popular. Many tenants are choosing to work on agreements that eventually cede the property to them. In many cases, the landlord is seen as the “bad guy”, one who may eventually renege on the deal or sell the property under the tenant’s noses. Rent to own properties are not just limited to apartments or condominiums, but also houses and other livable properties that a money-smart owner is using as passive income.
However, many landlords who go into a rent-to-own agreement are also taking a huge risk financially. Tenants who miss payments or go back on the deal are not only depriving the property owner of income, but can cost him or her hundreds, if not thousands of dollars when it comes to lawsuits or evictions.
One way to avoid this situation is to screen and check backgrounds on your tenants before signing any agreements. This way you can be reasonably sure that the tenant is serious and has the financial backing to honor the deal and eventually buy the property, apartment or house from you. The current economic situation means you should not just look at a potential tenant's credit score upfront, you also have to look at his or her paying habits and other criteria.
Once you find a tenant and have him or her fill out a rental property application form, make sure you include a disclaimer and waiver to allow you to check his or her credit history. A smart landlord should also ask for contact numbers from previous landlords if they have a history of renting, as well previous addresses and any information you find pertinent.
When checking the credit history, keep an eye out for a history of eviction or late payments not just for rent, but for other loans like credit cards, car payments or even mortgage payments. A person who is usually late on bills payments usually keeps this habit up even when financial circumstances change. Remember that a poor credit score because of an unforeseeable or onetime event, such as job loss, is not usually an indicator that the tenant is a future deadbeat. It may just mean they were unlucky in the current economy.
Talk to old landlords as well. Many landlords will give a good reference if they are trying to get rid of a bad tenant, but you will find that some are brutally honest. Many will tell you about a problem tenant or at least drop hints if they have had problems with them in the past. Make sure you check their employers or get employee references too. This way you can be sure that the tenant has some form of steady income and the upfront cash needed to actually pay the higher down payment required for rent-to-own properties.
If you are renting out houses or property that is not under your direct supervision, take the time to check on their previous residence to see if it is in good condition. Tenants who allow the property to deteriorate may damage future property values or at least set you back later on if they move on — you will be stuck with renovation and repairs.
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Rent to own homes are fairly new to the real estate industry. They give a great opportunity to homebuyers that would like to test drive a property or some that don't quite exactly have a down payment yet. Search all rent to own homes in your area.