The dream of owning a home is something that many people aspire to, but the road to homeownership can involve some challenges. For those with poor credit or limited savings, a traditional mortgage may not be an option, leaving them to consider alternative options such as rent to own mobile homes.
Before we begin you should understand that under the SAFE Act and Dodd-Frank compliance, certain regulations apply to rent to own mobile homes. Mobile home park owners who are not licensed as a mortgage originator, should be aware of these regulations and seek professional advice to ensure compliance. I will touch on these laws a little bit later on.
In this blog post, we will look into rent to own mobile homes and how they can be a win-win solution for both mobile home park owners and mobile home tenants. We will discuss the basics of how rent to own mobile homes work, the laws that surround them, and the major advantages that they offer.
How Rent to Own Mobile Homes Work
A rent to own agreement typically includes the following elements:
- An initial down payment, usually around $500-$1000.
- A monthly rent payment, which may include a portion that goes towards the purchase price.
- An interest rate applied to the loan.
- The parties include the current property owner who is listed on the title of the home.
- A buyer who needs to borrow money to purchase the home for sale.
- The buyer borrows the money and signs a note, made payable to the current property owner, who now acts as the lender.
Rent to own mobile homes are typically located in mobile home communities and are owned by the park owner or an individual landlord, who now becomes your lender as well. During the rental period, the tenant is responsible for maintaining and repairing the home, as well as paying for insurance and any taxes. The SAFE Act and Dodd-Frank Act do not specifically address the responsibility for maintenance and repairs in a rent to own mobile home agreement. However, they do have provisions that aim to protect consumers and ensure fair lending practices.
So, this sounds great, but let’s just see if we can provide a little more information on the laws before we go into the benefits of rent to own mobile homes for both mobile home park owners and residents.
The SAFE Act and Dodd Frank
First off, I am not a lawyer, this is just what I believe that I understand and maybe it will help you make your own smart decisions in your business. Okay here we go.
The SAFE Act and Dodd-Frank Act are federal laws that were put in place to protect consumers and regulate the financial industry. The specific provisions of these laws that pertain to rent to own mobile homes may vary, but generally they are aimed at preventing mortgage fraud and ensuring that consumers are provided with fair and transparent lending practices.
The SAFE Act requires mortgage loan originators to be licensed, registered and fingerprinted. This applies to anyone who gives a loan application, offers or negotiates terms of a loan, or makes a credit decision in connection with a residential mortgage loan.
The Dodd-Frank Wall Street Reform and Consumer Protection Act includes a number of provisions that are designed to protect consumers in the mortgage market, such as the ability to repay rule which requires lenders to ensure that borrowers have the ability to repay the loan and the requirement of a loan originator to make a good faith effort to determine the borrower’s ability to repay the loan.
In terms of rent to own mobile homes, these laws may require mobile home park owners and landlords to follow certain regulations when offering rent to own mobile home opportunities, including disclosing all terms of the agreement to the tenant, providing clear and accurate information about the home, and complying with all applicable fair lending laws.
Compliance with these laws may vary depending on your state or jurisdiction. You should always seek professional advice whenever you have legal questions or concerns.
The Perspective of a Mobile Home Park Owner
One of my favorite real estate related authors Zalman Velvel says that when you fill a vacant lot in a mobile home park that you own you have achieved the “triple zots.” This term stuck with me right from the beginning, not only because its super fun to say, but also because of the power behind its meaning. The triple zots refers to you as a park owner making money in the 3 different ways listed below:
- By selling a rent to own mobile home and acting as the lender
- By filling a vacant lot in your park and collecting lot rent
- By increasing your net income and therefore adding value to the mobile home park upon a sale
This is seriously powerful, and I am going to illustrate this with numbers for you. Let’s say as a park owner, I buy a used mobile home for $5,000, pay $5000 to move it to my vacant lot, and another $2000 to do some light rehab. I am all into this home for $12,000. I could try and sell it for cash, but most buyers don’t have the $12-$15,000 that I might ask. The option I have that benefits me and the buyer is to rent to own this mobile home.
So, I am going to rent to own this home for $24,000. I am going to ask for $2,000 down and the tenant will pay $395 per month. It will be paid off in a little over 4.5 years, that’s way shorter than a traditional mortgage. The buyer will also have to pay lot rent in the park of $305 per month. Their total payment will be $700 per month.
From the park owner’s perspective what did we achieve from our $12,000 investment? We received $12,000 profit from the home payments and $17,000 in lot rent over 4.5 years. We also added $30,500 in value to the park the minute we had filled the vacant lot, because each filled lot is worth 10 times (or more) the current lot rent. So, if we were to sell the park once the rent to own agreement was completed, we would have achieved a $59,500 profit on our investment of $12,000 over 4.5 years or 110% per year.
Now this example is in a perfect world where there are no expenses related to that lot, but you get the idea of how powerful this is for the park owner. The best part is that this rent to own contract is a major win for the resident as well, let’s explore.
The Perspective of Mobile Home Tenants
For mobile home tenants, rent to own mobile homes can be a great option for several reasons:
- An affordable option: This is the biggest benefit. Rent to own mobile homes can be an affordable option for those who may not qualify for a mortgage due to low credit scores, insufficient down payment funds, or other factors. As a park owner, you are able to offer flexible down payments, reasonable monthly payments, and short pay off times.
- An opportunity to become a homeowner: Rent to own mobile homes provide an opportunity for tenants to become a homeowner by making regular rental payments. Traditional mortgages on single family homes can last as long as 30 years! A tenant that is renting to own could pay off their mobile home in under 5 years and now they only pay lot rent which averages $300 in the U.S.
- The flexibility to move to a different location if desired: Rent to own mobile homes offer the flexibility to move to a different location if desired, as the tenant is not committed to purchasing the home. This is beneficial for those who are unsure about their long-term housing plans or who may need to relocate for work or other reasons. You may say well in this case the tenant could have just rented the home, right? The answer is yes, but the rental price is usually the same or higher than the rent to own price, so they have the choice of possibly saving money and building a little equity.
Rent Credit Program
There is a lot of confusion on the best way to be compliant with the laws applicable to rent to own agreements nowadays, so I thought I would add in a brief section to give you and idea of what other park owners are doing.
Some park owners are allowing mobile home tenants to purchase a home through a rent credit program. In this program, current tenants continue to pay their regular rent. Each month the tenant will get a credit. Once they get enough credits, they can redeem them for the title to the home. Another way to look at this is a portion of the rent goes toward toward the purchase price of the home. The title is assigned to the tenant once they reach the agreed upon price.
With rent credit programs, there are typically no down payments required and tenants can continue to pay their normal rent until they have accumulated enough credits to purchase the home. This is a very easy way for tenants to become homeowners.
To recap, the main features of rent credit programs include:
- No down payment or fees required.
- Tenants continue to pay their regular rent that was agreed upon in their lease.
- A portion of the rent or a credit is applied towards the purchase of the home.
- Once the agreed upon purchase price or credit amount is reached, the landlord assigns the title to the renter for free.
- This can be a great option for those who may not qualify for traditional mortgages or have limited savings.
Final Thoughts: Rent to Own Mobile Homes
Rent to own mobile homes and rent credit programs can be a great option for those looking to achieve the dream of homeownership. These options can provide an affordable alternative for those who may not qualify for traditional mortgages or can’t afford down payments.
This can be a win for mobile home park owners as well by filling vacant lots, generating income, and feeling good that you provided housing to those who need it most. The diligent park owner should be aware of and should comply with the SAFE Act and Dodd-Frank compliance regulations regarding mortgage origination. When in doubt, don’t hesitate to consult with an attorney!
It’s also important for potential tenants to carefully consider all the factors involved before entering a rent to own or rent credit agreement and to seek professional advice if necessary. With careful consideration and the right approach, a rent to own mobile home or a rent credit program can be a great stepping stone to achieving the dream of homeownership and financial security.