I could have sworn that I read (not on this website) about a court case where a tenant was able to gain not only a share of equity from the time of the ruling on the case, but also all prior equity from the beginning of the contract. I believe this was due to the tenant having the majority of the burden of ownership, and from the contract lasting longer than 3 years. I would have posted this under the Landlording section, but I seem to recall that this case resulted from a lease option of some sort.
Has anybody heard of a scenario along those lines? I’m considering doing a lease option with one of my properties, but am very hesitant to do one for more than three years because of the court case that I thought I had read about.
Most tenants are too stupid to know their rights and that is the main reason these deals work. Keep in mind you can call it whatever you want, but if it likes a sale, it will be treated like sale. That means foreclosure to get the property back and the tenant gets equitable interest. Lease options with non-refundable option fees and above market rent where the the tenant is responsible for things outside the normal rental agreement look no different than owner financed sales. The IRS even calls lease options disguised sales. There’s also an issue with making the tenant responsible for taxes, insurance, and maintenance. How do you argue your intent is a rental when the tenant is responsible for things that are normally the responsibility of the owner? I have yet to see any guru talk about these issues in a meaningful way. They only mention the non-refundable fee and extra rent that can be collected.
You can do a rent to own situation without triggering these adverse effects, but it takes away the benefits. The non-refundable option fee becomes a free right of first refusal that expires at the end of the lease term. Taxes, insurance, and maintenance are added back into the cost of the property for the sale. In this case, the money is made only if the tenant purchases the property. Traditional lease options make money because the tenant doesn’t buy the property and the owner keeps the option fee and has collected above market rent.