In these posts we discuss owning and operating single family rental property in the Dallas, Fort Worth, Denton area. Mostly we discuss specifics about how to buy, how to rehab, how to find good contractors, how to market, how to find good tenants etc. Now and then we discuss other broader topics as it is of interest to the readers of this blog.
By the way, we insist in these blogs that if you want to get started owning and operating rental properties in the DFW metroplex, you must get a mentor first. Read the blog post on that and get started.
In this post we are going to discuss the topic of “Rent to Own”. Given that the housing market is supposedly down and people are presumably not buying houses, several owners are finding it perhaps difficult to sell. If you noticed, I used three terms of doubt in my previous line that’s because I don’t believe that any broad statement about how good or how bad the housing market is, is right. Real estate is always local. My kitchen would sell a lot quicker than my study! Anyway, that’s besides the point. Let’s get back on topic.
So what are you doing when you are providing your property for “rent to own”. The deal typically is, someone makes an offer that they want to rent your house now and buy it later. While they are in your house, they want to build equity. Now, if you are a seller who’s having trouble selling your house and is already not using the property, then having someone else foot the bills and buy when they are ready seems like a really good deal. So you go for it. In every contract there are duties on either side. Let’s analyze your duties here.
When you offer the property for rent, who are you? You are a landlord? No. Not yet. You are the owner. As owner you have duties. Pay taxes, pay insurance, maintain the property, so on and so forth. When you find a person who want’s to live in your property and you sign a lease, what do you become? A landlord. You trade some owner duties as paying for utilities and mowing the grass in for other duties like collecting the rent (yes that’s the duty that comes due most often if you operate rentals like we teach you in these blogs), property inspections etc. Now, there’s a 16 page document promulgated by the brilliant minds of the state legislature (a bunch of attorneys) that describes these and the tenants duties. 16 pages! You buy a property in 7 pages!
In the “Rent to Own” scheme, we have looked at the “Rent” part. Now, let’s add to that the “Own” part. Right of the bat we need to add those 7 pages into the deal. When you are offering to sell a property, who are you? Owner, yes? and? yes, Seller. What are your duties as a Seller. Primarily it is to get a good price for whatever you are selling, but also standing behind what you are selling. Sellers in the state of Texas are required to provide a “Sellers disclosure”, publishing any and all known defects in the property. Note that as a landlord, there’s no such thing. The onus of finding and reporting defects to you is on the tenant; and some take that job too seriously!
What else kicks into place with a “Rent to Own”. The resident wants to build equity. Who normally handles equity reports? Who knows better how much equity you have in your house? Yup. Your bank. Your bank that gave you the loan to buy your house. Now, you may or may not have a mortgage on your home when you are toying with the idea of “Rent to Own”. Remember, when you agree to allow someone else to build equity based on payments they make, you have agreed to become “The Bank”. Just a small note about being a bank: most of them crashed in 2008! and those were real ones. If the resident is building equity in your property, will they want to avail their mortgage interest deduction? You bet they do. So do you know how to provide a 1098 Mortgage Interest Statement? How many pages is a “Deed of Trust” by the way? Let’s add that to our contract page count. Don’t forget to add the “Seller’s Disclosure” as well.
Now, many who ask me this question also feel that a lot of this paperwork doesn’t need to happen. It can just be a verbal agreement as I know this person who wants this arrangement and I have a good feeling about this. The Texas Property Code has serious requirements for documentation and statements. Not providing an annual accounting statement can cost you $250 a day till conditions are corrected, in addition to claimed damages.
Let’s look at one other duty before we summarize. Where are you going to close this deal? Yeah, close this deal? I challenge you to find a title company that will help you here. So, comes our fifth role, you are the title company. Did you make sure to get the correct survey to the buyer, or was it the tenant, or was it the borrower, or was it the mortgagor? What about the HoA covenants you had to provide? Did you take care of that?
So when you enter this deal, you are Owner, Seller, Landlord, Bank and Closer. How many of these have you been before? One and several years ago perhaps another one? Invariably, when I’m asked this question it is by someone who’s never even had a house sitter before but suddenly they have found someone whom they can profoundly trust despite their past mistakes or was it misfortune you say? So what happens when you do all the docs and they don’t pay? Do you evict them or foreclose on them? You are foreclosing on your own house? How does that work? By the way, if you still have a loan on your property, does your bank know about this? Does your insurance company know about this? Read your Deed of Trust. Read the “Due on Sale” clause. Read half a dozen other pages where your bank will dictate how the property can be used….and you thought you owned your home!
Seldom I see a non scam artist market a property for “Rent to Own”. It’s often – someone approached me and said they would buy my house when the two blue moons line up – story. Don’t fall for it. Often they know what they are doing and you don’t.
