Does anyone understand the new law concerning lease options in Texas? Can you still do a lease option and if so what are the guide lines?
Here’s the way I read it, and PLEASE someone correct me if I’m wrong–this affects me, too!
For contracts of less than three years: If you, the seller, lease a home with an option to purchase, you cannot do this unless the property is owned by you free and clear. There can be no pre-existing financing on the home. This type of transaction is also now considered an executory contract, or an outright sale, which means rather than deferring capital gains taxes until the tenant exercises the option, you pay them immediately. It also forbids you to keep their option fee for default on the lease (late payment), or to charge a late fee in excess of either 8 percent of the monthly payment or the actual cost of processing the late fee, whichever is less. After January, if you conduct two or more property transactions per year (which I hope we all do!), for each day you fail to provide the clean title to a tenant who has exercised his option to purchase, you’ll be charged $250 a day plus attorney’s fees.
Would anyone else like to contribute their interpretation? Hope this helps.
Do you think we can get around this by changing the description to owner finance rather than rent to own?
The only way is to put the property in a NARS land trust for three years. A land trust is protected by Federal law as an asset management strategy and in no way will be affected by Texas law. It is not an executory contract.
Good luck.
Thank you Gary. Can you put a property in a NARS land trust when using the sandwich lease strategy?
Absolutely. Here’s an example. I have a property in Atlanta that an old couple purchased earlier this year. They have had health problems and want to move back to NY. Very little equity. I had them place the property in a NARS land trust in their name and paid them $2,000 in moving expenses. They appointed me as a Beneficiary of the trust and leased the property to me on a triple net lease at $1100 per month. We agreed that the value of the house is $180K. I then sub-leased it to someone who will live in the house on a triple net lease – payments, occupancy, maintenance and repairs, etc. I have a $200 per month positive cash flow.
In three years, the new lessee who also has a beneficiary interest in the trust will be able to purchase the property at FMV and refinance to accomplish this, even though he is only on a lease. The original loan will be paid off and only at that time will any transfer of title occur.
I am not on title, nor on any loan. My cash flow is $200 per month and I’ll make about another $20K in 3 years. If my tenant defaults, he will be evicted, not foreclosed upon and I’ll just find another tenant. But why would my tenant default? He is writing off the property taxes and mortgage interest and sharing future equity 50/50.
I have NO management or collection responsibilities as this is all done by my Trustee who handles all my deals – a non-profit corporation.
I used lease options for 20 years and even wrote a book on them. That was then and this is now. I would not do any deal without a NARS land trust. It is complete protection and the best asset management strategy.
Gary, thank you so very much. Your information is very helpful. Do you know how many land trust can be set up by one person or corporation? Thankful in Texas!
How does the tenant/buyer take advantage of property tax write off and mortgage interest? Isn’t the property title and loan in the original owners name until tenant exercises the option? Also, when you reference sharing in future equity 50/50 are saying the tenant shares as a result of appriciation in property value or is there a dividing of the actual profit made at the sale? Are you requiring option money from the tenant buyer when they sign the lease agreement? I usually ask for 2.5 - 5% for a one year lease so would I now ask for additional option money to cover the triple net lease?
Thanks
The trust is personal property. When the RB puts up three months rent, plus closing costs, we make him a beneficiary of the trust. As such, he is an owner of the trust and even though he is only leasing, for tax purposes, the IRS considers him an owner and whoever makes the payments can take the interest and tax writeoff. It’s the only situation where a Lessee can have the benefits of home ownership.
Closing costs would consist of any money I put up, plus trust costs. In the previous example, the closing costs were less than $3K, plus there monthly rent payments.
Tenants are happy to pay a higher rent and take responsibility for maintenance and repairs in exchange for the previously mentioned writeoffs, plus a 50/50 share of appreciation. In the prior example, the tenant and I will share everything over $180K in three years. Let’s say the property appraises at $220K. The tenant and I wil each make $20K ($40K / 2). Great incentive for the tenant who will keep the property in great shape.
There is no need to increase any deposits.
Thank you for all the detail. I think I have a better understanding now.
If I’m not mistaken, Bill Gatten, the creator of the NARS Land Trust System is going to be in Texas very soon to debate an Attorney at the Dallas Fort Worth REIA on the use of Land Trusts in Texas and the new legislation.
If I lived in Texas I wouldn’t miss it.
Thank you Scott. Do you know how I can find out more about Bill Gatten’s potential trip to Texas? I would really like to attend.
Pam
If you go to the NARS Discussion Board you will find this as a topic.
(Moderators - I know this was reported, but it’s okay. Thanks. TR)
Thank you for all the infomation.