Some investors have asked over the past few years about using the lease to own or lease option as an exit strategy. There are lecturers who recommend this method and who describe the process in glowing terms. The lease option as it is described by such people is ideal for investors who want the benefits of owning rental real estate but who do not enjoy the burdens of being a landlord. According to what some lecturers say, the investor can, through inserting a few simple phrases in the option agreement and using a method to screen the potential tenant buyers to focus on those who have an owner’s outlook, effectively transfer the burden of maintaining the property to the tenant buyer. Thus the lease option investor is depicted as being in a type of landlord’s paradise—rent is coming in on time each month, the landlord receives tax benefits, the landlord never receives a call about a problem with the property because the tenant buyer does all maintenance and even some upgrades, and the payday is in sight, when the tenant buyer becomes the buyer in fact.
Imagine this scenario: you as investor have found a tenant buyer for your single family residence, and using the instructions in a course you took you insert terms in the option agreement such as “tenant buyer agrees to do all maintenance and repairs necessary to keep the property in compliance with applicable codes,” and “any use by tenant buyer of the fact that there is an associated lease to attempt to have the landlord perform maintenance or repairs will be a default under this option, resulting in its immediate termination.” Your tenant buyer happily signs the option and the associated three year lease “at the kitchen table,” pays the first month’s rent with deposit and takes possession of the house.
A few months later, you receive a call from the tenant buyer about some maintenance or repair issue at the property. Let’s say it is a broken furnace, and let’s say it is wintertime when you receive this call. Let’s say that the tenant buyer had a furnace repairman come out to the house and look at the furnace and the repairman pronounced the last rites over the furnace. That furnace is history. You know enough about the cost of furnaces to gently remind the tenant of the language about repairs in the option agreement, and suggest that if the tenant does not want to pay to replace the furnace, then you and your partners (really just you) would be happy to convert the lease option arrangement to a standard lease. You remember that the lecturer in the course you took predicted that the tenant buyer would buckle under this implied threat to cancel the option and agree to bear the cost of replacing the furnace in your house. You helpfully offer to advance the cost to put in the new furnace in exchange for an increase in monthly rent such that the higher rent will have paid for the cost of the furnace in three years.
But this tenant buyer says, “You know, I thought you might say something like that. I reread that provision in the option agreement and before I called you just now I asked my uncle, who is a lawyer, about it. He said that in Washington unless specific requirements are met, a landlord cannot make a tenant do repairs such as replacing a furnace or pay the cost of such repairs to residential property, even if the tenant previously signed an agreement to do the repairs. He also said that again unless those requirements have been met a landlord cannot threaten to terminate an option in order to make a tenant who is also an option buyer do the repairs, once the tenant has asked the landlord to do the repairs. And according to what my uncle said, you did not do the things necessary to make the option provision about repairs binding on me.” The tenant buyer then asks when he can expect your installer to arrive at the house with the new furnace, because the weather is cold, and he says that he is not interested in paying any higher rent than the current level. You determine that your best course under the circumstances is to pay for the new furnace and hope to recover the cost of the furnace from the profit when the tenant buyer exercises his option and you sell the house. The net effect is a reduction in your expected profit at the time of exercise of the option. And this tenant buyer decides not to be shy about calling you for other repairs as well during the term of the lease.
This example illustrates that it is important for investors who use lease options as their exit strategy in Washington to consider various aspects of the lease option before entering into these relationships. The key point is that a lease option contains a lease that is not exempt from the normal requirements of such a document simply because an option is also involved. It is doubtless true that many lease option relationships exist with such provisions as are described above and the tenant buyers in fact do minor or sometimes not so minor repairs and even upgrades to the properties without a complaint or adverse outcome and such buyers reap the benefits when they exercise the options and purchase the properties. Such a scenario as depicted here is still possible, and unpleasant surprises such as these are always unwelcome. The good news is that there are ways to achieve many of the investor’s desired objectives without disregarding tenants’ rights.
The foregoing is intended for education only and should not be interpreted as legal advice.
