Definition of a Rent to Own Agreement
Rent to Own agreements are a hybrid of rental contracts and purchase agreements. They include a fixed length rental period, followed by a unilateral or mutual option to purchase the property, once the option is exercised. Thus, Rent to Own (RTO) agreements usually consist of two or more different agreements, which are often tied to the consideration of the tenant making monthly payments, instead of making a down payment on the purchase price. For example , a RTO agreement may consist of an initial lease agreement for a two-year period and a potential purchase option agreement with a purchase option that is effective at the end of the lease period (for an additional 30 days).
For people having difficulty getting approved for a home loan, RTOs can be attractive, both from the perspectives of tenants and landlords. Tenants who normally would not be able to buy a house can sign a RTO agreement without being approved for a home loan and start enjoying the benefits of homeownership until they are approved for a home loan. Owners of real estate who are unable to sell their homes can keep them until they are sold by renting them for the RTO period.
Additional Requirements in Texas
In Texas, rent to own agreements, sometimes referred to as lease purchase agreements or lease with the option to purchase agreements, do have some specific legal requirements. Like other states, Texas law dictates that any written lease defined as an installment land contract or executory contract must state whether the buyer or seller has the burden of payment of ad valorem taxes on the property. In addition, the seller is prohibited by statue from transferring the property during the period of the lease unless (1) the buyer consents to the transfer in writing or (2) payment has been made in full.
For the seller, there are a few key protections in place when drafting the rental contract. First, the seller is only required to make required repairs to the roof or exterior walls of the property up to the amount equal to the value of one month’s periodic rental installment. However, if the seller can show that the lessee caused the damage, these repairs are then the responsibility of the tenant. Second, the seller is not responsible for any damage to personal property located on the property by a flood unless a verbal or written agreement is made with the tenant prior to the signing of the lease.
Third, the seller must exercise a fair degree of judgment when setting the rental period and payment amounts. In effect, the seller cannot charge unreasonable rent in an attempt to make the eventual sale price look like a discount in order to qualify for the legal exemption from the DTPA. A rental agreement may be deemed installment land contracts or executory contracts "used in this state primarily for personal, family, or household purposes" and therefore subjected to the requirements of Chapter 5 of the Texas Property Code, if the following six conditions are present: 1) the contract is for an interest in real property other than a leasehold, 2) the buyer pays or agrees to pay a portion of the price in installments over a period longer than 7 days, 3) the buyer is given a right to possession or use of the property, 4) other than a lease providing for periodic rental payments, the contract does not provide for periodic payments for property other than the real property, 5) payment under the contract occurs over a period of one year or more, and 6) payment under the contract exceeds $250 or a greater amount set by statute.
Essential Clauses and Terms
It is important not to overlook the terms of the agreement. Be sure to ask your attorney which terms he or she recommends including in the contract before you sign it. Some key terms to consider including in your rent to own agreement include:
· The price of the property. While you may not get the same asking price if you wait until the house is completely ready to sell, it is important to avoid being taken advantage of and to understand the value of the house beforehand.
· How much will be paid as a rental payment? Both parties should agree on a fair rental payment for the home while it’s on the lease. There should also be an agreement on when to begin payments.
· How much will be paid as an option fee? In many cases, the option fee is a nonrefundable fee. This should be considered IN addition to the purchase price, which the buyer will agree to pay no matter what.
· How long will both parties wait to sign the contract? This is usually anywhere from two to five or more years. There should also be a deadline by which the buyer decides on whether or not he or she wants to purchase the property.
· Who will be responsible for the maintenance and repair of the property – and when? Will both parties take care of certain responsibilities? Will there be certain exceptions? This clause is particularly important to avoid any arguments later on in the process.
· Are there any legal disclosures related to the property that must be made? Be sure to check with the law to confirm which ones you must give.
Extra consideration should be paid when it comes to determining the rent to own agreement for leasing out your property. It is best to have an experienced attorney draw up the contract so your best interests are always kept in mind.
Advantages and Disadvantages for Tenants
The main pro for tenants is that this type of agreement allows them to work toward buying their home. Rent to own contracts in Houston can allow the tenant to buy the house for its value at the time of purchase rather than paying the appraised or market value. Tenants can usually get financing with a fifteen to thirty percent down payment, in contrast to paying twenty percent or more. This is a good way to gain equity while living in the home.
A big con is that the tenant forfeits the option fee if he doesn’t close on the sale. An average option fee can be around five thousand dollars. If the tenant decides the home is too small, in a bad neighborhood, or doesn’t have enough bedrooms, he can’t get the option fee back.
Another downside is that if the tenant cannot make the monthly rent payments, the landlord may terminate the rental agreement and the tenant could wind up homeless. A tenant may not be able to claim the home as exempt from bankruptcy either, as the property owner is actually the landlord at the time of filing.
A tenant also does not have freedom to remodel the home. If he wishes to make changes to the home, he has to ask first. This is not as bad a problem as one would think. Most landlords do not mind minor modifications, like painting a child’s room or adding shelving. But a tenant who wants to remodel the kitchen may be told he has to wait until he is approved for the mortgage.
Pros and Cons for Perceived Sellers
A rent to own lease purchase option agreement has some benefits that might appeal to Texas landlords. Offering the benefit of the rent to own option can give landlords an edge over other landlords who are not willing to offer it. The upfront option payment is deposited into a rollout escrow account for later application to the sale price as long as the tenant buyer fulfills their obligations. And the tenant buyer is much more likely to take rigorous care of the property to protect their financial interest. Furthermore , a contingent sale with a cash closing on a specified date gets the property sold without waiting for financing to be approved. However, landlords should also consider the risks involved with a rent to own option for their property. The most significant risk is the tenant breaking the lease and defaulting on the agreement. But there are also significant property management issues to consider. If the tenant does not live up to their obligations and vacates the property, the landlord will have to deal with the eviction process and re-lease the home.
Creating a Rental-to-Own Agreement
If you decide to work with a rent to own agreement, there are a number of practical steps you can take to make the process go smoothly. Start by finding an attorney with experience in rent to own agreements, and ask them to begin drafting your agreement. You may have to negotiate and compromise with the seller or buyer, so be prepared for a little back and forth about details.
In some situations, you may need to have a real estate agent to help you finalize the deal. It’s always a good idea to consult an attorney in advance, but in some cases an attorney’s involvement is actually required by law. (This is a particularly common situation for down payment assistance programs.)
There are a number of documents that are important for rent to own homes. While some of the contracts completed during the process may only be a single page, others could be dozens of pages long. The following is a list of the most common documents involved in a rent to own agreement:
However, some rent to own contracts require additional documentation, including supplier contracts (for things like home improvement contracts) and more. This is one reason why it’s always a good idea to speak with an attorney well versed in these situations.
Resolving Disputes and Hiring LegalHelp
Conflicts arise in any situation involving two or more parties, and rent to own agreements in Texas are no exception. There are various types of disputes that may occur in such arrangements, including but not limited to the tenant not making the timely required payments, the tenant making physical damage to the property, the tenant attempting to circumvent the rent to own process, disputes over repair responsibilities, and disagreements over walk through discrepancies. In many cases, the owner/seller and tenant/buyer will be able to work out the conflict on their own, without resorting to litigation. In order to avoid disputes in the first place, it is crucial that both parties clearly understand their obligations under the terms of the agreement. If the tenant does not understand the agreement or the payments are not being made on time , the owner should have the individual seek legal counsel to assist him or her with the matter. The goal is to prevent issues before they arise, as once serious issues have arisen it is often challenging to resolve the matter without litigation. A skilled real estate attorney can either act as the mediator to facilitate a solution or can advise the landlord on how to proceed with the situation. In some instances, regardless of what measures are taken, disputes cannot be avoided and legal action is needed in order to settle the matter. An experienced lawyer can provide the legal guidance necessary to resolve the issue in a timely and cost-effective manner. Given the often symbiotic nature of these transactions, however, it is crucial that the parties communicate frequently and openly in order to prevent litigation.