Two points are worth mentioning. The first is that any of these devices – lease purchases, lease options and contracts for the deed – if only slightly modified, can be hybridized with something else and push the transaction deeper into the hole in the executable contract. The second point is that these hybrid contracts remain performance contracts regardless of the final form of these hybrid contracts for the purposes of the rules and sanctions of articles 5.061 et seq. of the Property Code. See our companion web article Performance Contracts in Texas. Because of the onerous requirements and penalties of section 5.061 of the Property Code, a landlord-seller may be tempted to rewrite a traditional hire purchase to call it something else or to give the impression that it is something else. The important point to remember is this: if the agreement is essentially an enforceable contract, then § 5.061 applies – regardless of the title or wording of the document. Judges tend to put substance above form (the «charlatan like a duck» rule). For homeowners who are 1) in a hurry to sell their home and 2) who are looking for a stable investment opportunity, putting their home on the market as a rent with option to buy may be the best option. It should be noted that real estate agents can be hired to help draft the contract, but otherwise agents are often not involved, as they would have no other way to earn compensation than by selling the property, which would most likely be several years in the future. The topics and terms that the parties to the agreement generally negotiate and discuss include: A lease agreement with an option to purchase in Texas is a lease with terms of purchase that allow the tenant to purchase the property before the contract expires.
As with any other lease, a lease defines the terms of the lease. It indicates the rental period, the amount of the deposit, the monthly rent and the tenant`s real estate costs. Under no circumstances should a real estate licensee attempt to prepare a hire-purchase agreement. Since there is no hire-purchase agreement form for licensees that meets the requirements of the Real Estate Licensing Act, a lawyer must prepare the contract. 5,070(a)(1) requires the Seller to provide the Buyer with a tax certificate from the collector for each tax entity that collects taxes due on the property. Paragraph 5.069(b) states that «if the property is not in a registered subdivision, the seller will provide the buyer with a separate disclosure form stating that utilities may not be available to the property until the subdivision is registered as required by law.» Rental purchases, deed contracts and rental options of more than 180 days are clearly defined as enforceable contracts subject to sections 5,061 et seq. of the Real Estate Code. The «180 days or less» exemption exists as accommodation for real estate agents, otherwise the TREC 1-4 contract in combination with a TREC temporary rental agreement could violate this provision. 5.070 (a) (2) requires Seller to provide Buyer with a copy of an insurance policy, record or proof indicating the name of the insurer and the insured. a description of the insured property; and the amount of the policy.
An additional pre-closing requirement for enforceable contracts is imposed by Article 5.071 of the Real Estate Code, which requires a seller to provide financial information similar to a RESPA disclosure: Before an enforceable contract is signed by the buyer, the seller must provide the buyer with a written statement that performance contracts, including lease purchases, are a form of financing by the owner. and therefore, the Federal Secure and Fair Enforcement for Mortgage Licensing Act («SAFE Act») and the Texas version («T-SAFE») apply. However, the seller only needs a permit if the property is not owned by the seller and/or if the sale is not made to a family member. The commissioner of the Texas Department of Savings and Mortgage Lending («TDSML») has ruled that T-SAFE will not be applied to people who make five or fewer self-financed loans in a year. Note that the T-SAFE licensing rule only applies to owner financing. Make no mistake, you can still make a transaction using a leasing purchase for more than 180 days, but there are now many requirements that did not apply before 2005. Sections 5.069 and 5.070 of the Property Code contain a number of these requirements that must be met prior to the signing of the executable contract by the buyer (i.e., before and not at closing): Before signing the lease, the parties negotiate a purchase price for the property. It is recommended not to negotiate the price at a later date, as the collection of the option fee is intended to give the tenant the opportunity to purchase at any time during the entire duration of the rental. The agreed amount remains unchanged for the duration of the rental. It is recommended that homeowners negotiate a price slightly above market value due to the likelihood that the home will appreciate.
Of all the parts of the agreement that can be negotiated, maintenance costs and ancillary costs are among the most important. Both parties should carefully note any type of costs and which party is responsible for them. In some cases, the owner may be willing to pay for all maintenance, insurance, and utilities except for routine grass mowing and other routine tasks. In other cases, the landlord may expect the tenant to be responsible for the majority of the costs of the home. Regardless of what is decided, the article should state exactly what has been agreed to avoid subsequent disputes. Hiring a lawyer to review the contract can ensure fairness and help point out unforeseen terms in the contract. What distinguishes a lease with an option to purchase is the inclusion of a «leasing option». With this addition, the tenant receives purchase rights on the property; However, the tenant may be asked to leave a deposit to guarantee his purchase rights. For this reason, a lease with an option to purchase is recommended for potential owners who are committed to a purchase, but need more time to prepare their finances. In a typical lease-purchase (or «lease with option to purchase»), a portion of each monthly rent payment is set aside and credited to the tenant-buyer`s down payment.
It is common (but not universal) for a lease purchase to provide that after payment of a certain amount, the tenant can either (1) convert the lease transaction into a self-financed sale transaction, where the tenant receives a warranty deed and returns a note and escrow to the seller; or (2) Seller agrees that the Renter-Buyer may prove the deposit accumulated on a loan application to a third-party lender and thus be eligible for take-away financing. 5.069(a)(2) requires Seller to provide Buyer with copies of privileges, restrictive agreements and easements that affect ownership of the Property. Buying apartments over 180 days is no longer a viable strategy for most investors due to the multitude of requirements and potential liability for poor execution. There`s really no way to use a stacking technique here, as is at least theoretically possible with rental options. Add to that the fact that the real estate code explains the open season to the investor-seller when a tenant-buyer is not satisfied with an executable contract, and there are more reasons to avoid rental purchases than to make them – especially since the loss of a lawsuit under an performance contract could represent a sunset event for a retail investor. Sensible investors avoid them. Many real estate lawyers will not make any rental purchases of residential real estate, as failure to comply with any requirements can create significant liability for the lawyer who prepares and submits the various disclosures and documents. There is also the «rule of 40 or 48» contained in Article 5,066(a) of the Real Estate Code: if the buyer has paid 40% or more of the purchase price or the equivalent of 48 monthly payments in a rental purchase, a notice period of 60 days is required, and if the defect is not remedied, a traditional foreclosure (no eviction) must be used, to regain ownership. Clearly, the intention is to discourage sellers from unfairly confiscating buyers` down payments and equity. The requirements of the Texas Property Code provisions that apply to lease-to-own transactions are complicated, and your client shouldn`t walk in without talking to a real estate attorney. .