Q. I moved to DC area from a state where I own a home. The home sale in that state is very slow and the price has not come back yet. I heard of the rent-to-own option. How does that work?

A. In rent-to-own arrangement, typically renters pay either a large upfront fee, called an option fee, of 1% to 3% of the home's purchase price, or finance the option fee by increasing the monthly rent. Usually some or all of the option fee is credited as a down payment on the house.

During the rental period, the landlord still owns the home and is legally responsible for it, but the renters often maintain the property as their own.
Landlords, as you move forward, make sure to:

Evaluate a potential tenant's income and job security as well as credit history.
Think through how you would cope if the tenant defaults or decides not to buy.
Talk to a tax expert to understand how the rent-to-own agreement would affect your tax position.

(above from the internet - the original link does not work now)

(below by David Chen) As an example ->

Purchase Price: $400,000.00

Option fee (upfront payment): 3% of the home's purchase price = $12,000.00

Or monthly option fee (portion of monthly rent that is set aside for a down payment): $12,000.00 / 12 = $1,000.00

For your rental in the other state, if the regular monthly rent is $3000.00, consider a monthly surcharge of $1,000.00 for the monthly option fee. That would bring your monthly rental income to $4000.00.

You can ask a realtor or an appraiser in the other state to help determine the sales price of the property.

Last update: 08/20/2015