During the last month, we had 5 prospective tenants ask us if we would set up a lease with an "option to buy."

First, is this some kind of a new trend developing out here in this hot real estate market? Secondly, since we have never before gone this route with tenants, what are some of the associated BENFITS and PITFALLS?

Thankyou

I just noticed the same thing on our local "for rent" FB pages. One poster is a professional tenant with a horrible record so I don't know if it is meant as a distraction similar to "I have cash and can move in today".

Renting with an option to buy involves 2 separate agreements.

1. Rental, standard with lease

2. Option to buy.. Separate agreement that says for $xxxxx we agree to give you the OPTION to buy this house for $xxxxxx for the period of X years. You can't sell the house during this period to anybody else. If they exercise the right, then you sell the house for agreed price. IF not, then you keep the option money and only the lease survives.

Where things get murky is when people try to combine the two. Pay extra rent and we will credit a portion toward the purchase when you exercise the option.... is a popular method. In some locations, this can cloud your title if they claim that the extra rent creates an ownership interest.

A judge can arbitrarily decide that the mean old LL was taking advantage and award the "extra rent" back to the tenant...

Unless you can structure the deal so that you get a substantial amount of NON REFUNDABLE money up front it's not worth it especially with our hot seller market.

No, Rent To Own is not new. Losers are not new. Prospects who want to do rent to own are losers. If a tenant can’t get a loan from a bank, which sizes up folks financially for a living, then they can’t get a loan from me. A poster on this board who does this a lot says these deals fall through 95% of the time. His operation is full-time, with multiple employees able to deal with the fallout, that a casual landlord would have a hard time dealing with.

Avoid.

Rent to own is an old concept that rarely works out. It's just an illusory way for tenants to dream of owning.

As a LL, I have done it once. It was a nice little 3+2 in a neighborhood which went from excellent to bad in 20 years. Rent to own was a quick and discreet way to sell it.

Here in California, if a tenant pays an "extra" amount in their rent which is going towards a possible purchase, then the tenant is "an owner by contract" and can not be evicted. A co-owner can not be evicted from their own property. Your lawyer has to first sue the tenant to sever the ownership legal issue, then after 9 months (courts are slow) you can sue for eviction. Taking one year of total time. Rent-to-Own is a method for tenants to free load and get out of paying rent for a year or so...

Several landlords here in Los Angeles didn't listen and lost their property, equity and credit due to "greed" getting an extra monthly income, instead of paying for an attorney to write up the contract of doing something to the property that will bring in more rent, instead of a rent to own.

For example, to get more rent you can:

Rent-to-own is the traditional method for people who are too risky for banks to give a normal mortgage to who want to buy a house. Or for those whose income can't qualify for a mortgage of the amount necessary. You have two things going on at the same time: a lease agreement and a purchase agreement.

Lease-with-the-option-to-buy is an agreement to rent the house for a certain period of time, and then they have the option of purchasing it at some point in the future, but not the obligation. That's kind of clunky, so if anyone actually said, "Lease-with-the-option-to-buy", I'd ask them to clarify that thought, because sometimes people mix up the terminology.

In Texas, rent-to-own has been abused by people who don't want to sell a property once-- they want to sell a property twenty times. The moment something is late, or the buyer makes a mistake, out they go, they lose all their money, and it's on to the next guy with a dream. I know one guy in a nearby market had his business profiled in the newspaper when a few people had bad encounters with him. Or people would complain he was selling a $40k house for $65k. Or whatever. But he would explain how everything was legal, and the inflated prices were due to the buyers being too risky for banks, so if he was going to give them the opportunity, that was the trade-off. And so on.

But because it's been abused by people for so long, Texas has very punitive laws in place for people who do it wrong. You can lose more than the value of the house if you make a mistake, and someone knows enough to call you on it. So we ourselves wouldn't touch rent-to-own with a stick. Likewise, in Texas, there's a certain point where a rent-to-own guy has no ownership interest, and they may be evicted as normal, versus when their ownership interest kicks in, and you need to foreclose if you need to get rid of them for an infraction. If you don't know what that dividing line is, you also shouldn't touch it with a stick... in Texas. :)

We ended up buying a house for taxes. The current tenant has been doing rent-to-own for the last three years... but any ownership interest he may have had got wiped clean when it was sold for taxes. We've agreed to sell the house to him. So our method is to transfer it to him via a deed, but also have a deed of trust, which explains that the transaction is not finalized until the entirety of the note is paid off. And then we have the note, which spells out the terms of the payments, obligations, and all that. If he doesn't work out, then it will be a foreclosure, not an eviction. But we're doing things the safe and prudent way-- in Texas.

Mac, so you heard from a wide group of folks about the shaky entry into the Lease/Option to Buy process. Now let me tell you about the back side-which is even WORSE. IF the tenants ever get to the actual buying, and now they are on an installment contract with you--YOU become the 'bank' and they are now the legal owners of your property. As the new owners they can:

-not pay the taxes

-not pay any insurance

-make any structural changes without permits

-paint everything black or shocking pink

-take out the lawn and put in stone

-open a bike-shop in the garage

-open up a day care---or

-a grow-house! and you have no control--you are only the bank.

Then if they don't PAY the monthly contracted amount-you can't evict them-you will have to FORECLOSE on your 'loan' They can abscond and abandon at that point-and some do, leaving you the mess.

Foreclosure is a very long and expensive procedure where the judge may side with the tenants(if they are fighting you)--and you have no control over that either. BUT if you are granted the return of your property--then YOU will pay to put the property back to a condition where you will be able to sell or rent it again! I have heard of 6mo to a year in court and $20,000 in damages. AND you will have to satisfy all the liens and taxes that stay with the property once you become the owner again, not to mention the code violations from unpermitted work.

You've got some good input. I've been looking into this myself and agree with most above. If you do move forward, get an attorney involved to draft the contract and make sure you are not giving them an ownership interest in the property for any up-front fees/charges.

Two thoughts. First, rent to own was traditionally used to entice the tenants to pay more with the dream that one day they would be owners. In reality, they never would see it through and the tenants would forfeit the extra payments.

Don, I am not confused at all. I did it 3 times. All 3 times after paying rent on the lease and with the drop-dead date coming up, they asked to buy the house from me on an installment plan. I had a LL friend who did it successfully (once) do the first one documents. Had a lawyer do the next one, and modeled the 3rd one on the lawyer's wording (almost a complete copy). All 3 'buyers' stopped making payments after a couple of months. When threatened with foreclosure the first 2 skipped out. The last one made an initial fight but ended up getting back at me by stealing me blind.

Mac,

This varies greatly by state. I see a lot of well meaning but short sighted or misinformed info on the thread.

We sign 50 leases a year, 48 of which are RTO. The other 2 are apts. All HOUSES are RTO.

Over the past 20 years that's 1,000 RTOs. Only 3 have gone to the bank and bought the home.

Done right, it is safe and profitable. In Indiana (learn YOUR state law) the written law says the Option Fee can be specified as non-refundable and not a deposit, so we've brought in THOUSAND$$$ in option fees from folks who, by their personal choice, decided not the stay. (48 leases x avg $1000 each is what we keep)

And in Indiana I can evict normally, charge for rent, fees, cleaning, and repairs without touching the Option Fee.

My paperwork does not give them any equity so we avoid the issue of ownership.

As you can see, it's wroth talking about in Indiana, maybe other states.

BRAD

Oh, and other LLs tell me it cannot be done, it's illegal, I'll lose everything, the sky is falling...

We laugh all the way to the bank.