As a real estate attorney, if I could name one transaction that causes more litigation and confusion than any other, it would probably be the rent-to-own agreement. I understand the allure. Rent-to-own transactions combine the best of a lease and a sale. In one simple document, without any financing problems, you get the best of both worlds! But therein lies the problem. Both the seller and the buyer are seduced into thinking they can have the best of both worlds, causing an almost inevitable mismatch of expectations. And unfilled expectations lead to litigation.
I’m not saying it can never work. When clients come to me intent on a rent-to-own arrangement, I help them pursue their goals with a strong contract, but I also provide strong warnings. So whether you’re a seller or a buyer, take note of the following risks before diving headlong into a rent-to-own transaction.
(To you clever investors, this warning includes the lease purchase option and the contract-for-deed, which are often disguised versions of a rent-to-own concept.)
WARNING FOR SELLERS
Your “tenant” thinks they’re already the property owner. As the seller in a rent-to-own agreement, you may view the agreement as nothing but a residential lease with a future ownership option for the tenant. In other words, they don’t have any ownership rights until the end of the payment schedule, and they certainly don’t have any ownership rights if they miss payments. Maybe you took a down-payment (disguised as an option payment). And maybe you conveniently shifted the burdens of maintenance to the tenant. But in the meantime, they’re still just a tenant, and if they don’t make the payments, you can shuffle into eviction court and change out the locks. You know this to be true, because you have a solid contract with entire pages reading “NO MONEY BACK – FORFEIT UPON DEFAULT.”
If your contract is strong, you’re protected 100% of the time, right? Not at all.
Recently, an attorney in my firm overhead an Oklahoma eviction judge say something like this: “If the document says rent-to-own, lease purchase, or anything of that nature, I read it as an equitable ownership interest, and it doesn’t belong in eviction court.” In other words, if an eviction judge catches even a faint whiff of the rent-to-own scent, he may very well toss the case out of eviction court and into foreclosure court, where long delays and high attorney fees prowl about, waiting to devour innocent real estate investors.
WARNING FOR BUYERS
Your “landlord” thinks you’re just a tenant. When you sign a rent-to-own contract, you see yourself as a purchaser, almost as if you bought a home with a traditional mortgage. Each month, you expect to build equity in the home. And if you make improvements to the home, you expect to enjoy the value of those improvements since you will eventually obtain a deed to the home.
That’s what you think.
But your seller probably thinks he can evict you like a regular tenant. Most rent-to-own agreement contain language stating that if the buyer misses payments, they can be evicted like a regular tenant without getting any money back. Although you may be able to fight this outcome in court, you don’t want to end up in court at all. If you don’t know your rights, or if you can’t afford legal representation, you may end up with an eviction on your record and a total loss of equity and investments in the home.
WHAT’S THE SOLUTION?
In light of the many dangers inherent in Oklahoma rent-to-own transactions, how should sellers and buyers best protect themselves?
The key is to avoid unfilled expectations.
Almost all legal disputes arise from unfilled expectations. Due to their hybrid nature, rent-to-own transactions naturally create unfilled expectations. For purposes of maintenance and taxes, the occupant expects to be viewed as a mere tenant. But for purposes of equity and ownership, the tenant expects to be viewed as the owner. Likewise, the seller tends to view the occupant as either a tenant or an owner depending on what is most beneficial to the seller.
In other words, each party interprets the transaction in the way most consistent with their own expectations. If the contract leaves room for interpretation, human beings pick the most self-serving interpretation. How shocking! There is a lot of room for interpretation in rent-to-own contracts under Oklahoma law. This means sellers and buyers must take extra precautions to ensure that each party not only signs the document, but fully understands the terms of the transaction. Both parties should truly be on the same page, with fully consistent expectations, so that it never even becomes necessary to enforce the contract.