Lease-Options in Texas

[Doug Vigliano]

I've hear that Lease Options is an issue in Texas?  I am moving out to Austin next summer due to work and was hoping to find a property to rent but also see if the property owner would offer an option to buy.  Is this an issue in Texas?  It is done very often here in Florida.  Any input is appreciated!

[Joseph B. Davisson]

As stated above, they are not worth the hassle, risk and expense.  I've never seen anyone do one correctly.  In most instances this seem like an attractive strategy because the buyer is under funded (otherwise they would be using more traditional means of financing) and this leads to cutting corners (costs) in the course of properly documenting the transaction.  Investors and seller end up using free forms they find online or forms provided by an investment seminar.  More often than not, neither of these sources properly account for Texas law.  

In light of Texas law, this one of those "creative" financing ideas pitched by seminar guru's that sounds great, but is not practical in Texas.

If you find an attorney in Texas willing to properly paper such a transaction, more power to you, but the liability and risks extend beyond merely drafting the documents.  There are accounting and reporting requirements that are ongoing throughout the terms of the arrangement.

As a tenant/buyer, you are less at risk, but enforcing such a deal if the landlord/seller changes his mind, or dies, or sells the property 

While the seller bears most of the risk in such a transaction, doing business with a seller who is willing to take this risk, whether they are aware or not, should also be an indicator of future interaction with the seller.  What other laws and duties are they willing to ignore or not care enough to investigate.

I would also like to add that I see new investors or investors with small portfolios structuring complicated entity structure like Limited Partnerships with corporate general partners, or forming trusts etc... in an effort to "creatively" structure purchases. While this sounds great on paper and may be suitable for sophisticated investors with significant portfolios and significant assets, more often than not, new/small investors do not consider the ongoing expense, opportunity cost and transaction costs of operating such structure. How much does it cost and how much time does it take to properly establish such a structure and what on the ongoing expenses? Drafting resolutions for each transaction, corporate minutes, annual meetings, maintaining separate bank accounts and bookkeeping for each entity, tax preparation, franchise taxes filing and payments... the list goes on and on. I see many wise investors who buy in their personal name or in a single simple LLC and buy insurance to protect themselves from liability. Consider general liability and umbrella policies to protect you rather than a complicated entity structure that requires ongoing expense and attention. Get you operation off the ground and streamline it later. Use your cash and time to find deals and generate cash flow.