I've hear that Lease Options is an issue in Texas? I am moving out to Austin next summer due to work and was hoping to find a property to rent but also see if the property owner would offer an option to buy. Is this an issue in Texas? It is done very often here in Florida. Any input is appreciated!
There are probably 100 threads on this on BP where it is discussed exhaustively. If you use the search function you can find a lot of good discussion on the matter.
The short answer is that they can be done, but with a lot of downside risk. I don't recommend them in Texas. Simply giving the tenant/buyer title and foreclosing if they don't pay is much easier in Texas IMO.
Not an expert but I understand that Texas lease options are very tricky and risky for the seller. Not so much for you, the tenant/buyer.
In Texas they are called Contract for Deed. If you go that route be sure to use a knowledgeable Texas attorney.
@Brian Gibbons you might get John on lease-options in Tx. Not an endorsement by me on any program.
Contract for deeds in Texas are highly structured and regulated, a real pain to go through, Texas attorneys I know of don't want to do them.
Tenant buyers usually pay way too much, financing terms do not add value to any property.
Search lease-options, predatory lending, the city has predatory practices on the books there as well. Buyer beware! :)
As stated above, they are not worth the hassle, risk and expense. I've never seen anyone do one correctly. In most instances this seem like an attractive strategy because the buyer is under funded (otherwise they would be using more traditional means of financing) and this leads to cutting corners (costs) in the course of properly documenting the transaction. Investors and seller end up using free forms they find online or forms provided by an investment seminar. More often than not, neither of these sources properly account for Texas law.
In light of Texas law, this one of those "creative" financing ideas pitched by seminar guru's that sounds great, but is not practical in Texas.
If you find an attorney in Texas willing to properly paper such a transaction, more power to you, but the liability and risks extend beyond merely drafting the documents. There are accounting and reporting requirements that are ongoing throughout the terms of the arrangement.
As a tenant/buyer, you are less at risk, but enforcing such a deal if the landlord/seller changes his mind, or dies, or sells the property
While the seller bears most of the risk in such a transaction, doing business with a seller who is willing to take this risk, whether they are aware or not, should also be an indicator of future interaction with the seller. What other laws and duties are they willing to ignore or not care enough to investigate.
I would also like to add that I see new investors or investors with small portfolios structuring complicated entity structure like Limited Partnerships with corporate general partners, or forming trusts etc... in an effort to "creatively" structure purchases. While this sounds great on paper and may be suitable for sophisticated investors with significant portfolios and significant assets, more often than not, new/small investors do not consider the ongoing expense, opportunity cost and transaction costs of operating such structure. How much does it cost and how much time does it take to properly establish such a structure and what on the ongoing expenses? Drafting resolutions for each transaction, corporate minutes, annual meetings, maintaining separate bank accounts and bookkeeping for each entity, tax preparation, franchise taxes filing and payments... the list goes on and on. I see many wise investors who buy in their personal name or in a single simple LLC and buy insurance to protect themselves from liability. Consider general liability and umbrella policies to protect you rather than a complicated entity structure that requires ongoing expense and attention. Get you operation off the ground and streamline it later. Use your cash and time to find deals and generate cash flow.
Here is a JD and LLM from Houston TX (real estate lawyer and Master in Laws)
Using a lease plus a ROFR is better than a lease plus option in TX :)
If you are the buyer then you want to make sure the contracts conform to Title 2 CH 5 TPC.
Also make sure the owner gives you the mtg. info and the mtg company has received an auth to release.
I'm not crazy about David Willis's website as he is confusing a lease option for a contract for deed.
The law is very clear which sections apply and don't apply.
Also, contract for deeds are almost unheard of after the tornado of may 2000 that wiped out a number of contract for deed properties and the investors weren't carrying insurance.
That is when an attorney I know (won't disclose his info here) worked with Mike Moncrief to tighten the laws of a contract for deed.
But you are looking at a lease option.
Not the same thing.
BUT, the law does require the seller to have specific verbiage in the contract.
@Brian Gibbons Those are helpful links. Thank you very much.
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