My initial intention on the house I purchased in October 2013 in downtown Austin was to flip it. It’s not selling, and I have to get out of my ridiculously high payments from my Hard Money Lender. I decided to keep it and rent it out. A potential renter - a UT Professor - wants to do a Rent To Own and wants to know the terms I would do. I HAVE NO IDEA! :shocked. I own 5 rental properties, but have only done plain old vanilla rentals… :help
If you are looking to sell the property and have a credit worthy tenant that wants to buy, rent to owns are AWESOME. It works like this, first you make a standard lease agreement - just like any other one you have written in the past. They pay market rent. The lease should be from the start date to the payoff date. Typically this is anywhere from 1 to 3 years. A security deposit is also included here as well. You are also responsible for the mortgage, taxes and insurance during this period of time.
There is also the purchase option agreement. The payment for the purchase option is called a rent premium. This is above and beyond the market rent and reflects a payment plan on the down payment. There should also be an option fee. This is a one time non-refundable deposit that is applied to the down payment. It is usually 1 or 2% of the purchase price. Speaking of purchase price, this is also established in this agreement. Locking it in at current rates.
In the event that the buyer backs out, all payments have been forfeited (which should be clearly stated in the option agreement).
Let me take a stab at correcting a few things as there are a few corrections needed here!
First the state of Texas has it’s own state laws, one of which say’s “A lease and an option can not be written within the same agreement!”
This means you can write a lease and you can write an option however if the lease (Rental Agreement) is broken the option is still in force and legally binding until the option period expires.
This means if our professor decides he needs to move or for some reason financially, familar status or employment leads him to move out, the option is still legally binding for the full option period even though you will need to rent the place month to month (Remember an option could be executed on a day or week of any month.
I wonder if you could get around the Texas law by putting a clause in the option agreement that the option only remains active as long as the buyer maintains the rental contract (i.e. stays in the house). To support the tenant, I would recommend having a sub-lease clause as well. In other words, the buyer is liable for the lease until the option, but they do not have to necessarily be the ones living in the house.
One very important factor is to have a well written lease agreement. You need to make sure you protect yourself and clearly state the responsibilities of your tenant.