How To Sell a House with a Lease Option

As I outlined in my previous article about lease options, the Texas legislature has made it very difficult to sell a house on a “rent-to-own” or lease-purchase basis. The statute – Texas Property Code Chapter 5, Subchapter D, beginning with Section 5.061 – prohibits any executory contract for the sale of residential property if the property already has a mortgage on it, and sets out draconian penalties for any violations of the technical statutory requirements. For these reasons, I have generally advised my clients not to sell their houses with lease options and instead offer owner financing such as a wraparound mortgage.

However, it is possible to sell your Texas house on a lease purchase, and in fact, that may be the best solution for some sellers and buyers. You just want to make sure you keep your transaction “out of the statute,” so you don’t have to jump through all those legislative hoops. And luckily enough, there is a statutory exception that will allow you to sell your house rent-to-own without worrying about having to give all the money back if you don’t follow every single technical requirement for the code.

Landlord-Seller 00 – READ ME Lease Option

This article, titled “Landlord-Seller 00 – READ ME Lease Option,” can be downloaded for $0.01 here or on my downloads page. (I wanted it to be free, but the shopping cart wouldn’t let me.) You can also download any or all of the contract forms you will need to sell your house with a lease option.

These are the documents you will need to sell your house rent-to-own:

Landlord-Seller 01 – Residential Lease Application

Even though you are qualifying your applicants as tenants, you are really qualifying them as buyers. Assuming you want them to buy your house, you are looking for tenants who can afford the eventual mortgage payments and all the other expenses of home ownership, especially if you end up selling them the house with owner financing. So you will want to see verified gross monthly income of at least 3% of the eventual purchase price (or, in other words, three times the estimated “monthly nut” of owning the house).

Landlord-Seller 02 – Residential Lease Agreement

This lease agreement does not mention the option to purchase and vice versa. This is not required by law, but it’s just a good idea to illustrate to your tenant-buyers that the option to purchase is completely separate from the lease, and that paying rent and otherwise being a good tenant is not what entitles them to purchase the house. It’s also worth mentioning that although the option to purchase itself needs to expire within 180 days of the effective date, the lease itself can be longer, so you can offer someone a 12-month lease with a 6-month option to purchase, just so long as they understand (and acknowledge in writing) that the option only lasts 179 days regardless of the length of the lease.

Now, I often get asked if it is legal to give the tenant-buyer a long lease (e.g., 3 years), and provide that the option does not begin until a date 6 months before the end of the lease (e.g., 2 1/2 years into the 3-year lease). The answer is: yes, it is legal, but that transaction will fall under the executory contract statute. Section 5.062(c) of the Texas Property Code says the statute does not apply to a contract

that provides for the delivery of a deed from the seller to the purchaser within 180 days of the date of the final execution of the executory contract.

So you cannot extend the closing date of the actual sale past 180 days in any case without being subject to all the statutory requirements. No thanks.

Landlord-Seller 03 – Option Agreement to Purchase Real Estate

This is obviously the crucial document in the transaction, the document that grants the tenant-buyer the right to buy the property. It is absolutely critical that the option agreement specify that the deed must be executed and recorded on or before 179 days after the effective date of the option, that there are absolutely no renewals or extensions of the option, and that the option consideration is absolutely non-refundable under any circumstances. This document doesn’t have any particular statutory requirements, but I would recommend putting some of the important language in bold all caps and having the optionees initial those paragraphs. This Option Agreement favors the Landlord-Seller very heavily.

Landlord-Seller 04 – Quitclaim Deed

The form of this deed is attached as an exhibit to my form of option agreement to be used whenever the tenant-buyers do not exercise the option to buy the property. Even though the option agreement specifies that it terminates automatically and that recording the option agreement is strictly prohibited and will also terminate the option automatically, it is a good idea to get the non-purchasing tenant-buyers to sign a quitclaim deed so that there is no doubt that they have no legal or equitable interest in the property.

If the tenant-buyers do exercise the option to purchase the property, congratulations! Most don’t. If they do, then you will need to execute a purchase and sale agreement quickly, and you may in fact be selling the house on a wrap or other owner financing now. If so, you will now need some of my seller financing forms, e.g., the wraparound mortgage documents.

Landlord-Seller 05 – Lease Option Bundle

This is a bundle of all of the documents listed above, including the READ ME article.

The purchase price for all downloads includes free updates forever.