Austin rent to own or lease options and owner financing might sound like similar ways to purchase a home, but the implementation of each has its own pros and cons. Rent to own or lease option is a process where the tenant pays for the home or the home down payment with part of the rent money. With Owner Financing, the buyer and seller write a contract that allows the owner to act as the mortgage lender and the deed along with full legal ownership transfers to the buyer at closing.
Austin Rent to Own Process
The rent-to-own process for homes is sometimes also known as a lease purchase option. The lease agreement between the landlord and prospective owners contains the standard agreement terms for a regular rental agreement, but additional clauses cover the rent-to-own clause. The tenant generally has a set amount of time to secure financing for the home, usually within just a couple years, and a portion of the rent goes toward the home down payment or mortgage balance.
The problem with most Austin lease purchases is that they go on to state that once a sufficient down payment is paid in, then the tenant/buyer will have an option to purchase the property at a certain price. Result? The lease purchase has become tangled up with a lease option – and this is its downfall. The document has become a hybrid: a “lease-purchase-option” that is subject to Chapter 5 of the Texas Property Code.
Why is this a problem? Because changes to Chapter 5 made in 2005 define residential Austin Texas lease options for longer than 180 days as “executory contracts” that are subject to strict regulation and penalties if not done exactly right. Contracts for deed also fall into this category.
The statute provides that numerous initial and ongoing requirements must be observed, and the burden is on the seller to meet these. Failure to do so incurs not only penalties under the Property Code (the return by the seller of all payments made by the buyer, including the down payment and monthly payments) but liability under the Deceptive Trade Practices – Consumer Protection Act, which can involve treble damages plus attorney’s fees. Even in smaller transactions, these can turn into big numbers quickly. Note that Chapter 5 includes no seller defenses.
The risk to the seller of using Austin lease purchase or rent to own options is now significant, and investors have therefore moved away from this device in favor of wrap around mortgages and Owner Financing.
Austin Owner Financing Process
Owner financing for Austin homes is an alternative financing option for buyers who are unable to secure conventional financing for the property. In short, an attorney writes a mortgage contract for the tenants that details the loan amount, the interest percentage, the repayment term, monthly payments and other clauses found in a traditional mortgage contract. Instead of paying a lender, the tenants pay the owner the mortgage payments and legally own the home as though they had purchased it using a mortgage loan. (See typical criteria buyers must meet to qualify to purchase an Owner Financed home.)
Forte Properties’ Austin Owner Financed home buying process goes much more in depth than what is stated above. We have our attorney draw up all docs including note, deed of trust and warranty deed + all necessary disclosures. We close at a title company with title insurance and ensure all paperwork is filed correctly and recorded with the county for tax records. We also have a third party loan servicing company that will field monthly payments from buyers, forward to underlying lender and/or seller and will also provide year end tax reporting. Working with a team of experts that know the ins and outs of the Texas owner financed home buying process will ensure each transaction is 100% Texas law compliant.
The main advantages of both forms of alternative financing is that it offers a way for bad-credit borrowers and borrowers with hard-to-document income sources to purchase a home. The Austin rent to own program can buy time for borrowers to fix their credit in order to secure traditional financing. Owner financing allows the tenant to bypass the bank and deal directly with an individual along with gain full legal ownership at closing along with all the tax benefits that come along with it. (See more advantages of owner financing.)
Rent to own offers are sometimes used for scams, where the tenants pay the extra rent on top of the normal rent payment, and are evicted without an option to recover the extra payments. That along with the Texas laws regarding Austin lease options that we described above make these types of transactions no longer advisable or even feasible for property in Texas. Owner financing may only be for a short time, such as five years, and the buyer needs to work on repairing their credit so they are able to refinance the loan once this period expires. The interest rate is also typically higher than a conventional mortgage loan.