Lease Option and Dodd Frank: is it legal?

7 Replies

The home in question is in Indiana. I want to know if an owner/landlord rents out a home to a tenant with a Lease Option contract where that tenant has the option to purchase the home at the end of the specified time span, is this agreement legal in Indiana in light of Dodd Frank regulations?

Lease with the option to buy, if done correctly, does not fall under the Dodd Frank regulations. If you would like some more information on the proper contractual forms please check out WendyPatton.com. She has extensive experience in lease options, and can provide you the proper documents.

I have no opinion on the website mentioned by @Jeff Helm , but I voted for his post because a proper LO is not impacted by DF.

Don't use 'rent to own' or 'rent credits / purchase credits' anywhere.

Mine are a lease with separate 'exclusive option to buy' and any consideration reduces closing costs at exercise.  

The act comes into effect mostly for people who offer seller financing to owner-occ primary res people more than 3x per year @Gulliver R.   If that's the case, be sure to run your buyers / tenant-buyers through an RMLO to prove they had the 'ability to pay'.

No legal advice given, just what I do and how I understand things.

@Steve Vaughan I read somewhere that having a separate Lease contract and then having a separate Option to buy contract is completely legal and cleaner setup for a Lease Option construction. I think that’s what you’re getting at as well, am I right?

@Gulliver R. Lease-option is indeed legal in Indiana. Note that if your contract will be 3 years or longer, you need to record it for it to be enforceable. I generally write mine up for 30 months because of this. Most of the time, you are technically not financing the property, so dodd-frank would not apply.

@Steve Vaughan You can use the term "rent to own" on a lease contract in Indiana. As long as your paperwork spells out that it is a lease-option, the courts will not have an issue with it. I have talked to a couple of different judges and they don't seem to care about your advertising verbiage as long as your contract spells it out. Now that isn't to say you shouldn't be clear up front and make SURE these folks understand it's a lease with an OPTION to buy, but I digress..

"Rent credits / purchase credits" - Most banks get really hinky about these. So the best thought from one banker was: When the owner occupant comes to refinance, AT THAT TIME, we will do a market analysis and whatever we come up with for average market rents is what we will use towards your rent credits calculation... SO if you have a Lease for $1200 a month, giving $200 a month credit, and they come through 30 months later and determine average market rents are $1100, then they will only allow you to put $100 a month towards the down payment... The other "rent credits" can be used for closing costs, and interest rate buy down, but not downpayment. 

A Fannie Mae article I found lists: Credit for the down payment is determined by calculating the difference between the market rent and the actual rent paid for the last 12 months. The market rent is determined by the appraiser in the appraisal for the subject property

I have heard of some people forcing buyers to pay with 2 checks.. One for lease, and one for rent credit.. That would probably work, but you would have to make sure the buyer knows that the rent credit check is non-refundable and considered option fee... Not to mention this is extremely annoying for buyers(to write two checks).

Originally posted by @Lee Smith :

@Steve Vaughan You can use the term "rent to own" on a lease contract in Indiana. As long as your paperwork spells out that it is a lease-option, the courts will not have an issue with it. I have talked to a couple of different judges and they don't seem to care about your advertising verbiage as long as your contract spells it out. Now that isn't to say you shouldn't be clear up front and make SURE these folks understand it's a lease with an OPTION to buy, but I digress..

"Rent credits / purchase credits" - Most banks get really hinky about these. So the best thought from one banker was: When the owner occupant comes to refinance, AT THAT TIME, we will do a market analysis and whatever we come up with for average market rents is what we will use towards your rent credits calculation... SO if you have a Lease for $1200 a month, giving $200 a month credit, and they come through 30 months later and determine average market rents are $1100, then they will only allow you to put $100 a month towards the down payment... The other "rent credits" can be used for closing costs, and interest rate buy down, but not downpayment. 

A Fannie Mae article I found lists: Credit for the down payment is determined by calculating the difference between the market rent and the actual rent paid for the last 12 months. The market rent is determined by the appraiser in the appraisal for the subject property

I have heard of some people forcing buyers to pay with 2 checks.. One for lease, and one for rent credit.. That would probably work, but you would have to make sure the buyer knows that the rent credit check is non-refundable and considered option fee... Not to mention this is extremely annoying for buyers(to write two checks).

Well I guess you CAN mention 'rent to own' if you want, then spell out how it's actually a lease with option to buy, but why bother?  I know it's better understood by the public, but outside of a CL ad that may say it once, to say it at all is inviting trouble.  Rent to own is specifically mentioned in DF as 'scammy', but lease options are not. 

I guess you could fart around with analyzing historical and current market rents, then apply $x towards closing costs, but this is much simpler:  TB/Optionee to receive 3% back in closing costs if exercised by month 12, 2% between months 13-21, 1% between months 22-30 (or some such).  Mine decrease the longer they take to exercise.

Writing 2 checks and trying to dissect which is which later with a lifetime renter so far?  Over-complicating things leads to headaches and confusion.  

@Steve Vaughan Your average person doesn't know the difference between a lease-option and a Land Contract(Contract for deed, etc).  Your title for ads need to be small.. So "Lease-Option to buy" doesn't get as many looks as "Rent to own!"  so that's why we use it.. I agree with you that it's burdensome, but this is the world we live in..

Have you been able to get that 3%, 2% 1% to work with banks? That sounds like they would have a hissy fit about it.. Then again most Lease-options never complete so.....

I agree with the 2 checks being over-complicated.. I never use it, in fact we don't give rent credits for a strict lease-option because the banks are so fussy... I just was offering up the idea that had been proposed to me, and that my local lender(s) had suggested as well...

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