The Pros And Cons Between Wrapping a Property For Profit And Selling A Rent-To-Own Property 

Why wrapping a property ? Well in the event that a potential property purchaser does not have the funds to purchase a property outright and is not eligible for loan approval from any of the traditional funding sources, a property owner or vendor may offer the purchaser vendor finance. This is a kind of loan transaction between the purchaser and the vendor of the property wherein the vendor has clear title of the property.  

However, in the event that there is an existing mortgage on the property for which regular repayment installments are being made, then the seller can still offer vendor finance, but in this case it is referred to as wrapping a property or "Property Wrap" for short.  

Pros & Cons of Wrapping A Property 

Some of the pros of wrapping a property include:  

· Avoidance of closing costs by parties;  

· With a tremendous potential for capital growth and positive cash flow, it is a very good investment avenue for the purchaser  

· The unprecedented opportunity of being able to own property despite the obvious lack of funds;    

· Borrowers benefiting as the deposits made are usually low unlike conventional mortgages;  

· Sellers will also have the advantage of higher interest rates and may even avoid certain capital gains taxes.  

The greatest risk that will face parties to this transaction will include default in payment leading to foreclosure.   As a property investor who is the original owner, you stand to lose.   This is also the case if the original owner defaults and the property is foreclosed.    

Pros & Cons of Selling A Rent-To-Own Property 

On the other hand, selling a rent to own property, also known as lease option or lease purchase in most jurisdictions, means that the property owner and the tenant agree to have a purchase option.   For example, the buyer pays the seller option money for the right to later purchase the property.     

The parties may agree to a purchase price immediately or the buyer may agree to pay market value at the time the option to purchase is exercised.   

Although this option is usually invoked for hard to sell properties, its pros for both buyers and sellers include: 

· Sellers will derive market value for the property and thus circumvent the prospects of servicing mortgages for a vacant property; 

· Sellers security is also guaranteed as any default on the part of the buyer will mean that they have a right to sell the property being the subject matter of the agreement; 

· Buyers will build their equity in the property and anticipate a rise in the price over time; 

· The deposits needed to be paid by buyers is generally low as compared to conventional home ownership; and 

· Buyers are assisted to create a consistent savings plan as part of their earnings goes towards the purchase price at the end of the selling for rent options. 

The cons for such an arrangement will include the inability of the seller to vacate the agreement and sell at a higher value if need be.   Such a need may arise, for example, when the market value of the locality sky rockets due to better infrastructure or discovery of minerals.    

The seller may lose his or her right to purchase the property quite easily!   In fact, any slight failure on their part will be permission enough for the property owner to sell the property for default.  

The potential profitability, of selling a rent to own a property or using the wrap around mortgages are what makes these types of investment attractive to skilled investors. 

You do however need the correct knowledge of the workings of the property market and the provisions of relevant statutes. It is therefore important for any existing or potential property owners to seek proper guidance from experts before they try out some of these real estate concepts. These experts must include lawyers, accountants and even land economists or successful property coaches and mentors. 

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