Most people are familiar with the Latin phrase caveat emptor, which means “buyer beware,” but investors and other homeowners attempting to sell their houses on a “rent to own,” lease option, or lease purchase should learn a new phrase: caveat vendor, or “seller beware.”
The Texas legislature has made it extremely difficult to sell a residential property on a lease option and comply with all the statutory provisions in the Texas Property Code. Chapter 5, Subchapter D of the Code applies to certain “executory contracts for conveyance,” meaning a real estate transaction where title (deed) does not transfer to the buyer immediately. And a 2006 amendment to this subchapter makes it clear that these provisions apply to lease purchase agreements in Texas:
an option to purchase real property that includes or is combined or executed concurrently with a residential lease agreement, together with the lease, is considered an executory contract for conveyance of real property. Tex. Prop. Code § 5.062(a)(2).
So the statute applies to lease options, but there are a number of exceptions and carve-outs that define what lease option sellers must do (and make the statute almost impossible to read).
First of all, the statute does not apply at all to rent to own contracts with a term of 180 days or less, so if your tenant-buyer can exercise the option within 180 days, you don’t have to worry about the statute.
However, if the option term is more than 180 days but less than three years, the landlord-seller must jump through a lot of hoops to comply with the statute.
First and most importantly, § 5.085(a) of the Property Code provides that a “potential seller may not execute an executory contract with a potential purchaser if the seller does not own the property in fee simple free from any liens or other encumbrances.” That seems to say that a seller cannot lease-option his property if there is a mortgage on it!
But hold the phone, because subsection (b) of 5.085 seems to indicate that there is an exception for purchase money mortgages (a deed of trust securing the payment of money used to buy the house).
Subsection (b) says that you can lease option a house with a mortgage on it if:
1. The mortgage was used to purchase the house; and
2. The seller gives the buyer a written disclosure not less than 3 days before the lease-purchase contract is signed (click here to download a disclosure that complies with the statute); and
3. The lien covers only the property being sold and secures a payment amount that is never greater than the amount owed by the buyer; and
4. the lienholder (lender) does not object to the executory contract and consents to verify the status of the loan on request of the purchaser and to accept payments directly from the purchaser if the seller defaults on the loan; and
5. the contract contains certain specified covenants (click here to download a rent-to-own contract that complies with the statute).
And that’s not all. In addition to all of those requirements, if the tenant-buyer defaults on a payment under the contract, the seller must provide a specific written notice of default to the tenant-buyer and allow the tenant-buyer at least 30 days to cure the default. Click here for a notice of default that complies with the statute.
Finally, section 5.073 of the Property Code prohibits landlord-sellers from including certain terms in the lease-purchase contract (such as the forfeiture of the option fee for a late payment). Click here to download a contract that complies with the statute.
So there’s a lot to do if you’re planning to sell your house on a lease option. If you don’t comply with all of these statutory requirements, you could end up forfeiting every penny that the tenant-buyer pays you, or have to pay treble damages and attorney’s fees, or something else horrible.
Click here to download the contracts, forms and notices you need to legally sell your house on a lease option in Texas, or contact me to talk more about legally selling your house on a lease option, lease purchase, or rent-to-own program.