How it's work rent to own in Houston TX?

Asked by Next Door Girl, Houston, TX Sat Jan 5, 2008

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Allen Hebert, Agent, Spring, TX
Mon Jan 7, 2008
The only thing that is certain about lease to own is that you can to a lease that includes an “option” to purchase. That option is an actual property right and can be structured so that the price would be set at that agreed amount in the lease should the tenant decide to purchase. Other methods used in the past for such transactions are the contract for deed. This is highly discouraged these days because after a set amount of equity is built in, the deed must be transferred and it looks just like an owner finance. If the buyer defaults then you have to have a traditional foreclosure.
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Don Tepper, Agent, Burke, VA
Sun Jan 6, 2008
To address a few of Bruce's points, it's true that some people in a rent-to-own arrangement don't end up buying. It depends, in part, on how the deal is structured. It also depends on the renter's/buyer's circumstances; sometimes they change so much that what appeared to be the right decision (to buy) isn't the right decision a few years later. Maybe the person got married, and the house isn't suitable for the couple. Maybe the person took a job elsewhere, and the commute doesn't work. And while most owners or investors who put rent-to-own deals together hope that the tenant-buyer will exercise his/her option and buy (because that's where the real payoff is), some investors are content with the constant churn of option money down, above-market rent for a year or two, then a new tenant-buyer, repeating the whole cycle. So, agreed, it doesn't always work out.

Note that the amount of money you provide up front is NOT a down payment. It's a non-refundable option fee. And it should be stated and presented like that at the beginning. It's the consideration that the owner receives for which, in return, he grants an option to the tenant-buyer. If the tenant-buyer does purchase, the option fee should be credited toward the purchase price. If the tenant-buyer does not purchase, he/she forfeits the option fee, just as any person loses an option fee if failing to exercise an option. But that should be made very clear to the tenant-buyer up front, so there are no surprises a year or two down the road.

There can be definite advantages to the tenant-buyer in a rent-to-own arrangement--locking in a price for the property, having much more of the lease payment credited toward the purchase price than would be realized from an amortized loan, having the ability to "walk away" after a year or two if the property didn't suit his/her needs. Gosh, imagine how many fewer foreclosures there'd be today if some of the people who 2 years ago were so desperate to buy that they did 100% financing, negative amortization loans, then got caught upside down. Worse case scenario if they'd gone with a lease-option: They'd have paid a nonrefundable option fee of maybe 3%-5% of the home's value, paid rent (costing no more than those artificially low first year mortgage payments), and now their maximum exposure would have been their option fee. Instead, thousands of people are losing everything. Yes, they made some very poor decisions in deciding to buy at (what we now now was) the top of the market, using some exotic loan instruments. When people aren't in a position to buy, but are eager to buy, a lease-option should be considered.

As for Texas effectively outlawing them--yes, there were abuses. You find different states reacting (usually overreacting) to abuses. In Maryland, a couple of years ago, as a result of some real abuses, a law (SB 761) was passed that makes it very dangerous and tricky to buy a house in preforeclosure. While there are some legitimate consumer protection elements in the law, it also pretty much eliminated the ability of many people facing foreclosure from selling their property during the month or so prior to foreclosure. So, the law is protecting people against some abuses, but has really hurt them in other ways.

Regardless, buyers, sellers, and agents should always be aware of, and abide fully by, the laws of whatever jurisdiction they're in.
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Bruce Lynn, Agent, Coppell, TX
Sun Jan 6, 2008
I personally don't like this idea. In my experience few people end up buying. This presents a problem as your contract normally obligates you to buy and puts your down payment at risk if you don't. If you want to rent --then do it, RENT. If you want to buy, then BUY, but don't mix the two. We've recently taken steps in Texas to prohibit these types of transactions. There are still people advertising such schemes and think they have a way around it, but the intent and content of the law is clear-NO RENT TO OWN. There's a reason for the law and that is that there were too many bad guys out there taking people's money in a lot of different ways. As a person wanting to rent you put yourself at some risk agreeing to these transactions.
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Don Tepper, Agent, Burke, VA
Sat Jan 5, 2008
I don't know Texas, but I'm a real estate investor (in Virginia) who does lease-options (rent-to-own) and have been told numerous times that Texas has a law that effectively prohibits lease-options. I'd suggest talking to a real estate lawyer and finding out exactly what the limitations are and whether there are any ways to accomplish the same result using a different technique. For example, I know investors in Texas who are using land trusts. To greatly oversimplify, the owner of the property puts his property into a land trust. The owner initially is the sole beneficiary of the trust. Then the investor is added as a beneficiary, if an investor is involved. Then a resident beneficiary is found--a person who wants to lease, then purchase. The resident beneficiary is added as a third beneficiary to the trust.

Meanwhile, in a separate document, the resident beneficiary leases the property from the trust. So the resident beneficiary really has two roles: One as a renter, leasing from a trust. Second as a partial owner of the trust.

After a pre-determined time, the property is brought out of the trust and the tenant-beneficiary is given the right to purchase the property at fair market value. Although he/she is purchasing at fair market value (versus a predetermined price, as generally occurs in a lease option), that purchase price is offset somewhat because the resident beneficiary is already a partial owner of the trust.

During this period, if the trust is structured properly, the resident beneficiary can claim the same tax benefits (interest deduction, etc.) that a homeowner would.

There's a lot more to it, of course, but that's one way that rent-to-owns are being done in Texas.

But find a good real estate lawyer, preferably one who knows and understands these techniques.

Good luck.
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