Texas Lease to Own Agreements Explained: A Complete Guide

Texas Lease to Own Agreement Defined

In Texas, a lease to own agreement, often referred to as a "lease to purchase agreement" or "lease with option to buy", is a legally binding contract in which a landlord (the "lessor") agrees to rent out a property to a tenant (the "lessee") with the option to purchase the property at a predetermined price during or at the end of the lease term. These agreements are similar to lease-purchase agreements commonly used in the sale of real estate, but they differ in that the purchaser agrees to a monthly payment equal to the rental amount with an option for ownership at the end of the term.
To enter into a lease to own agreement in Texas , the lessor and lessee must both be legally competent parties – typically an adult individual or a business entity such as a licensed limited liability company. The agreement typically involves a down payment (or option payment) paid by the lessee to the lessor upon signing of the agreement. There is no universal form for lease to own agreements in Texas, but a basic agreement should include the following:
The term of the lease to own agreement depends on the agreement of the parties, but in no case should it exceed 12 months. Under the Texas Residential Leasing and Rental Act codified in Chapter 92 of the Texas Property Code, a landlord may not attempt to avoid the part performance rule by including a term that surpasses the one-year limit.

Advantages of a Texas Lease to Own Agreement

There are a number of reasons both tenants and landlords are starting to consider entering into a lease to own agreement, also known as rent to own, when renting their real estate in Texas.
From a financial and legal standpoint, consider the following benefits:
A tenant can take advantage of a portion of his monthly rent being credited toward the costs of purchasing the real estate itself. While this does not put cash in the tenant’s pocket, it is a significant benefit for a tenant who will eventually pay more than he is paying on a monthly basis in rent and prepare the tenant for home ownership by showing that he is capable of paying the additional costs associated with owning the property.
Renters can try out property ownership before committing to purchase. A lease to own agreement gives a renter time to decide if he really likes the property and truly wants to buy it. The tenant is never obligated to purchase the property if it is not a good fit for him.
A lease to own agreement also gives renters the opportunity to build or establish credit so they can qualify for a mortgage. If a tenant has a low credit score or no credit to speak of, he can use the rent to own period to make timely payment each month to pay off any existing debt and build his credit rating in order to qualify for a mortgage.
Landlords can benefit from a lease to own agreement, as well, because it gives them a potential source of profit and reduces expenses with vacant properties. Landlord can choose a renter who can afford the additional costs of owning property and is more likely to care for the real estate better than a tenant who does not intend to purchase his property.

Basic Essentials of Texas Lease to Own Agreements

Similar to a traditional lease agreement, Texas lease to own contracts also contain a variety of specific terms, deadlines and conditions. Whether you are a landlord, tenant or an agent representing one of the parties, it is paramount that you have a thorough understanding of these agreements. Here is a breakdown of the main components.

1. Options Fees

An option fee is the amount of money paid by the tenant to sign a lease to own contract. It is a non-refundable payment that must be applied to the purchase price of the property at closing.

2. Purchase Price

The purchase price is the amount of money that the tenant must pay at the end of the lease term in order to obtain legal ownership of the leased property. This price is agreed upon at the start of the lease term and is included in the lease to own contract. It is important to recognize, however, that the seller is not obligated to sell the property for the amount of the purchase price if a disagreement occurs. The property must be sold for "no less than the amount specified in the contract," so it is still subject to upwards fluctuations in the real estate market.

3. Lease Duration

When a lease to own agreement is signed, it usually comes with a 12-month lease duration. However, a standard Texas lease to own contract states that the lease will continue on a month-to-month basis unless all of the daily and monthly amounts due under the contract are paid at least 5 days after they are due. Once this happens, the contract expires and the contract will no longer be in force.
Other aspects of Texas lease to own contracts that you should familiarize yourself with include disclosures, time of possession, maintenance responsibilities, breach of contract and assignment, termination and condemnation.

Legal Issues to Consider in Texas

Texas law provides certain legal protections for all forms of leasing agreements, including rent-to-own contracts. For instance, the law grants residential tenants the right to receive a copy of the lease after execution. Landlords are also required to inform tenants at the time of rental request whether a bill or credit plan is available for an appliance being rented. Landlords must accept rent payments by mail unless otherwise agreed in writing and must provide a receipt within a reasonable period of time once payment has been made. They also cannot include provisions in the rental agreement that allow them to garnish a tenant’s wages, allow them to enter the premises without cause, or authorize them to initiate lockouts or change locks without consent. Consumers in Texas are also protected from the threat of "self-help" eviction. This means the company cannot take possession of a person’s rented property unless the contract has expired or has been terminated. Furthermore, they cannot physically remove a person from the premises or change the locks. If they attempt to take these actions, they have committed theft. Rent-to-own providers must also notify customers of all fees and charges associated with the agreement. This includes estimating the total cost of the good and standing by this estimate for the duration of the contract. A good amount must also be estimated if a customer wants to purchase it. Texas law also prohibits rent-to-own providers from engaging in false or deceptive representations to acquire customers, including giving the false impression that ownership of an item is achievable in a short period of time. Enforcement of these laws falls under the Texas Attorney General’s Office, which has the authority to issue penalties against companies that violate the law. Companies can be fined between $100 and $1,000 per violation.

Common Problems and Their Solutions

In the realm of Texas Lease to Own Agreements, a number of challenges may arise that can complicate both the purchase process and ongoing compliance. A common issue involves potential financing problems. Depending on the specific terms of the agreement, financing may be necessary to complete the purchase. However, some financing options may be more suitable than others, with certain lenders requiring higher interest rates or larger down payments. It is essential to find a financing solution that fits within your budget to avoid setting yourself up for financial hardship.
Another potential pitfall is the enforceability of contract provisions. If the terms of a Lease to Own Agreement are not carefully reviewed, you could find yourself on the wrong side of an unenforceable contract . For instance, if either party included a provision that is in violation of Texas state law or federal law (such as a predatory lending clause), this could jeopardize the entire agreement, leaving you without the house you thought you were purchasing.
To navigate these challenges effectively, it is also highly recommended that you work with an experienced attorney throughout the process. While some aspects of a Lease to Own Agreement may seem straightforward at initial glance, there may be hidden complexities in the purchase process that could cause issues down the road. Your attorney should be able to walk you through these issues with an eye toward ensuring total compliance with all Texas real estate laws, and this will help to ensure that your rights are protected at all times.
By being proactive and finding legal representation early on, this will make it easier to identify potential issues with a Texas Lease to Own Agreement and analyze them in greater detail.

How to Create a Texas Lease to Own Agreement

Even if you have a common set of provisions for lease to own agreements that you typically use, there are a number of things that can change how a Texas lease to own should be drafted. For instance, additional requirements for certain properties under Texas property code will necessarily impact how you draft the lease. Specifics of state law will also affect the lease term, rent credit, rent payments and transfer of title upon payment of the remaining balance.
More importantly, the process for drafting a lease to own is somewhat unique as it needs to comply with specific consumer protection statutes. Among other things, the lessee must be given an opportunity to get the residential property inspected. The lessor must also give the lessee a notice of his/her right to a refund of the one-month rental payment within 72 hours after the property is made available for occupancy if the lessee does not find the property in compliance with applicable building and housing codes.
It is not uncommon for a buyer to finance the purchase through a mortgage or other financing within three years of executing the lease to own agreement. At this point, the lessor must complete a notice of rescission and refund the lessee any money that he/she/it wishes to recover at the time of rescission. Before transferring title, the owner must follow Texas Finance Code section 8.102 in order to provide the purchaser with all title documents in compliance with Texas Deceptive Trade Practices and Consumer Protection Act.

Frequently Asked Questions Regarding Texas Lease to Own Agreements

A number of questions about Texas Lease to Own Agreements arise from time to time. This posts provides answers to those questions, including:
Q: How long does a lease to own home agreement last?
A: To comply with federal law, the duration of any lease to own home agreement or contract must be less than 18 months.
Q: Should the lease to own contract specify a purchase agreement timeframe?
A: Without a specified timeframe, the purchaser loses the leverage to negotiate a purchase within a reasonable timeframe. A general guideline is from six months to a year. You can establish a reasonable timeframe without locking into a lease.
Q: What if the seller or landlord is not willing to provide an option to purchase the property?
A: Sellers/landlords and buyers may enter into a separate purchase agreement. Spur more conversation regarding the purchase timeframe.
Q: How do lease to own options affect property liens?
A: All leases take precedence over liens , but the lease to own option creates an owner interest in the property, which takes precedence over subsequent liens and allows foreclosure by the option holder. Investors often do this for vacant property purchases, but leases or installment sales may not be done. Include a priority of liens clause to specify that the lease to own contract takes precedence.
Q: Can lenders participate in lease to own arrangements?
A: Mortgage lenders commonly disallow rent-to-own arrangements as a condition of the loan. This is often included in the list of requirements, so check with your mortgage lender.
Q: What is the difference between a lease option and a lease purchase?
A: A lease option means the leaseholder is not required to purchase the property at the end of the lease. A lease to own requires the leaseholder to purchase the property after the contract term.