Rent-to-buy deal puts family in a bind
Housetraders Realty faces lawsuit after jacking up price

By Dick Hogan
Originally posted on June 13, 2006.

Richard and Melissa McGlade thought they were on the verge of owning their own home.

Instead, they find themselves entangled in a legal dispute over a rent-to-buy contract for the Cape Coral home they’ve lived in for two years.

Experts say the McGlades and their four children are among many who have run into trouble with rent-to-buy ownership, a common real estate purchase method around the country. It’s generally used by people with poor credit or low income who can’t qualify for immediate property ownership.

Rising real estate prices in Southwest Florida have only added to their problems. The median price of an existing single-family home was $280,500 in April — up 52 percent from the April 2004 figure of $184,100, according to the Florida Association of Realtors.

April Charney of Jacksonville Legal Aid, an expert in landlord tenant and foreclosure issues, said what happened to the McGlades is a “variation on the theme” for rent-to-buy arrangements.

Usually, she said, “What happens is people don’t get to the point of being able to say, ‘I’ve paid everything, give me my deed.’ The first time they miss a payment, they’re slammed with that eviction notice. The ‘renter’ loses absolutely everything the first time they miss a payment.”

The Florida attorney general has received 13 rent-to-buy complaints in the past year and is investigating Affordable Property Management Inc., a rent-to-own housing company owned by businessman Riyad Khleif of Venice.

Charney said there could be an increase in rent-to-buy problems if increasing interest rates and soft real estate prices force more people into foreclosure.

The answer, she said, is first for people to avoid rent to buy.

“I’m really down on rent-to-buy transactions,” she said. “That’s not a solution for folks who can’t get conventional financing. It’s way too risky.”

In the McGlades case, they agreed to let Housetraders Realty buy their house and put them in another Cape Coral house that they could buy for $165,000 after paying rent for two years.

Then, Melissa McGlade said, they faithfully paid their rent for two years until the agreed-upon date of April 1, 2006. With the help of their mortgage broker, Linda Ireland, they prepared to close the deal.

But the deadline came and went, and Housetraders refused to close the deal. McGlade said the company offered to sell but for $120,000 more than the original price.

They’ve filed a lawsuit in Lee Circuit Court to force Housetraders to sell, but the company maintains in court papers filed by attorney Augustin Simmons that the contract doesn’t obligate Housetraders to sell. Simmons did not return calls from The News-Press and a Housetraders official declined to comment.

But the McGlades’ lawyer, Esmond Lewis, said Housetraders’ obligation is clear under the contract: “To sell the house at the price the parties agreed to two years ago.”

Even at $165,000, he said, “they’re still going to make a pretty penny.”

Charney said that in the long run, rent-to-buy problems will be solved only by an organized effort to help people before they get to that point.

“We need community-based debt management centers so people who are low-income or in dire straits can go and access specialized debt default management. We need to have places where people can get access to credit rehabilitation.”

Kevin Jursinski, a Fort Myers-based real estate attorney who’s also a real estate investor, said rent to buy can be a risky proposition for both sides.

He represented the tenant in a case similar to the McGlades’ last year and won, he said — but cautioned that a lot depends on the exact wording of the contract.

He cautioned that “if there’s an ambiguity, it’s construed against the maker. If you were writing it, you should have made it clearer.”

Trying to set a price for what a tenant will pay two years from now probably isn’t a good idea because it’s too far out to make a good guess, Jursinski said. “You really can’t predict it.”

He’s trying to lease out a house and may go the rent-to-buy route, but wouldn’t set the decision date later than one year out if a specific price is specified. Longer terms would need some kind of formula, perhaps based on the prevailing price of homes.

Attorney general spokeswoman JoAnn Carrin said people should look before they leap. “The main thing is they need to read the contract very carefully before they sign it. They might even want to have someone experienced in real estate read it for them and just be aware of what they’re signing and what the conditions of the lease to buy the property are.”

Melissa McGlade said the dispute with Housetraders has thrown a crimp into the family’s efforts to get back on solid financial ground.
She works full time at Iguana Mia restaurant in Cape Coral and her husband is a transmission technician at Dixie Buick in Fort Myers.

But times are still tough, Melissa McGlade said. Their son Nicholas, 5, is doing well now but has needed heart surgery since infancy and will require more in the future. That means more trips to All Children’s Hospital in St. Petersburg.

“It’s not right,” she said. “We’ve been excellent tenants. Whenever there have been repairs that needed to be made, we’ve done it. They know my son has heart problems. How can you do this to a family?”

A sad story to be sure but one anecdotal tale like this should not be a basis to condemn an entire way of doing things.

I've done many lease purchases over the years, both on properties I own personally and for clients.

Sure we make money on them, that's what free enterprise is all about.

However we have never preyed on ignorant or unsuspecting buyers to make a buck and our buyers have always ended up both homeowners and happy in the end except the few that don't do what they say they will do.

13 complaints in one calendar year for a state the size of Florida does not seem like a lot to me.

I'm a fan of creative financing, but prefer contracts for deed over lease-options, simply because they are far easier (from what I've seen and done) to convert to coventional financing than a lease-option. Those are still looked at as you are only a tenant, whereas CFDs are usually seen as you already bought the property and only have to refi, which has more lenient guidelines. Ofcourse, as in ANY transaction, the deal is only as good as the people involved. Anyone entering into these types of deals absolutely NEEDS their attorney to look everything over...

I have to say that I also still consider lease-options not only a great way to get a home, but a great investor tool.

I have only been involved in a handful of these, but in each case the buyers ended up not only owning the house but enjoying huge equity.

A legally binding lease-option is just as good as any other instrument.

R

Different forms of creative real estate transactions fit different situations. As an investor seller, I would never use CFD... you loose too much control... however as an investor buyer or just buyer the CFD would be preferred. As the Seller the LO is by far the better form. It all depends on which side of the transaction you are on.

Obviously the contract did not address the possibility of the value of the property going up or down within the 2 years. A major oversight by whoever wrote the contract.
When it was time to hand over and sell the property, the seller had second thoughts, because the value had increased above his expectations.
I believe and hope, the renter will purchase the property at the initially agreed upon price, because in the absence of a value escalation clause, the owner will be out of luck, and so will be the person who wrote the contract.

It is my understanding that here if you do a rent to buy option here, the renter/buyer has to offer and sign a purchase contract at the time of rental. This can also be a problem if the parties agree to pay too much/little at the time.

My attorney advised me that the Option to Buy can double as the purchase and sale agreement, provided it contains everything that state law requires to be in one. He's in the process of creating such a document now.

As for a valuation clause, I set my option price at the high end of today's market value for a 1-year option, adding 5-10% for a 2-year option. It is my fervent hope that the appraised value is higher than the option price when the option is exercised, because my lenders treat a lease/option as refi.

I also make sure that my non-refundable option payment isn't really high. It's usually equal to one month's rent.

Am I giving away some profit? Sure, but I want all my actions to point to the fact that I'm providing a valuable service and a tangible benefit to my tenant.

Mike,
I`d love to receive a copy of the document that your attorney is preparing to use for my investors as well.

The whole point of every lease option I have seen is that at the front end of the option, all parties agree on a purchase price.

This can sting you either way. If prices go down, the buyer (if they choose to exercise the option) end up paying more for the property than they would have normally.

Why would any buyer do this? Well... it's pretty simple really. They had to put some money down to secure the opion and if the agreement was written correctly, some % of the rent has been going toward the purchase price. If they don't exercise the option, all that money is forfeit.

So, if you add up the down and the monthly contribution to purchase, that number should be less than the amount home prices have dropped in order for it to be worth you leaving the deal. This could happen, but I have never had it occur in my market.

As for increased valuations for longer options, that really depends on the rest of the agreement.

The california assocation of realtors provides us with a Lease Option contract and for all intents and purposes, it IS a purchase agreement.

R

Scott,

I'm not sure I'd be comfortable using a legal document generated in another state. With that caveat, I wouldn't be opposed to making it available once I finally get it and am happy with it. Send me a PM and we can discuss it.

The only other thing I'd caution against is an integrated "Lease/Option" document. I've been told that a lease/option in some states can be considered equitable interest in real estate. If you do it wrong, and the tenant/buyer doesn't pay, you can't simply evict. You'd be forced to foreclose. Not fun.

It is also possible that an integrated "lease/option" agreement might be a violation of your mortgage. Read the due-on-sale clause very carefully.

Most experts suggest having two separate agreements: a very good lease and a very good option to purchase. Make sure the option agreement cannot be recorded. Keep the two agreements very distinct. You have a tenant with a lease. Your tenant also purchased an option to buy. One has nothing to do with the other, except that you'll want a clause in your option making it null and void if they aren't physically living in the property when they try to exercise. Therefore, should you have to evict, the option goes away (hopefully).