How do I add to the lease agreement and clause that gives the tenant an option to buy or present an offer any time in the future? State Specific Question About: ARIZONA (AZ)

Saved from Lynda and Elia's postings here (edit for state specific content):

OK, here it is:

FIRST--there is no such thing as 'lease purchase documents."(or rent to own) That very phrase mixes apples and oranges. There is always 2 dif documents--the regular lease that regulates the tenant's behavior while residing IN the property, and the Option to Purchase paperwork where the tenant purchases an option to buy the property.

SECOND--doing a Purchase Option is very tricky; the one I have is TX specific. You will have to use one that is proper for MO, BUT I will give you some very imp things to include and NOT include in your option wording. The tenant-buyer first purchases an exclusive option to buy your property. This option gives them something and gives you something. The tenant is purchasing exclusivity and TIME. The option ensures they have the sole right to purchase the property for a fixed time(2 yrs), for a fixed price. During this time they keep current on their rent(which you can afirm to their bank a good payment history), they try to correct any dings in their credit, and they save for a downpayment toward their loan. You can help with this too, as at the closing table, you can award them $50-100/mo for every month that they paid their rent on time (e.g. if they had a 24 mo Option and they paid rent on time every month--when they got to the point of getting a loan you could fund them $1200-2400 toward their loan downpayment). The tenant pays you several thosand dollars for this Option--what they buy is time and exclusivity.

The money they pay you is never called a Downpayment or a Deposit. It is a non-refundible Option FEE. That fee repays YOU for keeping your property off the market, turning down other offers, and keeping the price fixed (even tho the property may appreciate in those 2 years). I even told my tenant buyers once that I would furnish them the $3000 they pay me for the Option, at time of closing to go toward their downpayment on the bank loan, if they followed all the requirements and actually got a loan at the end of the period.

and another view:

I have slightly different perspective on Rent to Own.

In most areas, RTO, Lease Option, Rent with Option to Buy, etc. are all the same thing. A land contract, sometimes referred to as a Lease Purchase, is highly frowned upon in NC so most atty's won't write them and most courts won't uphold them. And, Mr. Rational is right - I can't think of a single benefit that would offset the nightmares of a land contract for a property owner.

We own 28 rental properties - 75% are set up a RTO's. In the past 3 years we've had a 65% successful conversion (renters who actually exercise their option). Frankly, I don't want any traditional renters - too many headaches and not enough income. As soon as a renter moves out we replace them with RTO's.

We charge 120% of standard rental and give them a 20% rent credit plus their option fee is credited back if they buy.

The 20% is a very deliberate number. Most people with credit issues will use FHA. FHA will only allow rent credits on that portion of the rent that EXCEEDS the fair market rental. So if FMR is $1,000 then the rent needs to be $1,250 for the FHA to accept 20% rent credit. Secondly, this rent corresponds to what their mortgage payment will be which demonstrates their abitily to pay the mortgage. (FHA considers mortgage payment as PITI, HOA, PMI).

We've had a high conversion (renter to buyer) because we are incredibly selective. Their credit can have dings and even bankruptcy but it has to be something they can repair in a reasonable amount of time 18 -24 months. Solid employment and debt to income ratio not to exceed FHA standard of 41%. Credit repair is compulsory.

As Mr. Rational points out - there are two separate contracts required - a lease and an option. The option contract gives a renter just that an option to buy if they fulfill the terms of the contract. However, if they elect to buy you are obligated to sell.

Be sure to check local county and state laws. There have been so many RTO scams that many are writing anti RTO laws to protect the consumer. Many now have limits on the amount of option money you can collect upfront and how much if any must be refunded if they don't buy.

If you market it correctly you can have a large pool of qualified RTO wannabes lined up so that when you buy more properties you have someone to move-in right after closing and rehab is completed.

One last thought. Even those who have who have not exercised their option have been great tenants. Paid on time and take great care of our property.

In our state, we use separate documents which DO NOT refer to each other.

THANKS MrRational!

Rita, the part he left out is that a very high percent of tenant/buyers cannot manage to exercize their option. They are renters that have 'big eyes' to own--but cannot overcome their propensity to renters mentality and bad money choices. Even tho I had all the 'right' paperwork, 7 years and 4 tries later--I still own that house as none of the tenants could manage to even pay their rent, let alone save for a deposit or clean up their credit. One of them took his savings of $6K and spent it all on a 'quinceneira' (a Hispanic coming-out party for a 15 yr old girl!) and one bought a honking new truck, and they couldn't understand why after 2 years they didn't have enough downpayment to get a bank loan. Very few sellers have the high accomplish ratio of MrRats. I would say from what I've heard from other TX LLs and my own experience that @90% of all RTOs/Lease Options fall thru.