Is an attorney needed to prepare a lease-purchase agreement?

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11/18/2016 | Author: Editorial Staff

My client wants to enter into a lease-purchase agreement with a prospective tenant. A former client's attorney prepared a lease-purchase agreement similar to what my current client needs. Can I make changes to the agreement so it's applicable to my client's transaction?

No. Under no circumstance should a real estate license holder attempt to prepare a lease-purchase agreement. Since there is no lease-purchase agreement form for license holders to use that complies with the Real Estate License Act requirements, an attorney must prepare the agreement.

Preparing your own document or changing a lease-purchase agreement prepared by an attorney for another transaction is a violation of the Real Estate License Act. Taking such action is the unauthorized practice of law. In addition, there’s a risk you could be sued by the parties if they have a disagreement over the lease-purchase agreement you prepared.

The requirements of the Texas Property Code provisions that apply to lease-purchase transactions are complicated, and your client shouldn’t enter into one without talking to a real estate attorney.

Categories: Legal
Tags: legal, legal faq, lease-purchase agreement


Comments

David Davis on 11/28/2016

Jimmy Royston,
I was delayed in responding as I wanted to check my facts before doing so.

In order to owner finance, the buyer must still be submitted to a licensed loan officer (in Texas) and have their financials reviewed (including credit and income) and the loan officer must issue a “Prequalification Letter” according to the “Qualified Mortgage Rule” under TRID (This thing just keeps on, and on, etc…).  The “Prequalification Letter” will typically say is the loan has or has not been underwritten.  The loan officer I spoke to said he does not underwrite the loan as he does not have an underwriter’s license in Texas.

Jimmy Royston on 11/28/2016

David Davis,
You are correct, it will require an attorney to draft the promissory note and deed of trust, etc., I have seen title companies offer to have their in house attorney draft these documents for a slightly lesser fee than most legal firms charge. However, the seller may not need the loan underwritten if they own the property outright and are willing to take the risk (Not that I would advise that of my client mind you).

David Davis on 11/28/2016

Jimmy Royston,
Where this will wind up heading to is you are still going to need to get an attorney to draw everything up., Prommsory Note, Deed, Deed of Trust, etc.  The attorney is not going to work for free or even very cheap.  Don’t forget the loan has to be processed/underwritten by a third party.  If that credit is bad, it’s bad.  Nothing is going to change that but time.

Jimmy Royston on 11/28/2016

Mr. McEwen,
It obviously depends on the property and the circumstances. maybe the buyer is doing a lease because he can’t qualify for a purchase due to credit issues. Maybe the seller owns it outright and is tired of leasing it. Who’s to say the seller doesn’t want to finance it? There could be any number of reasons/scenarios.

Mike McEwen on 11/28/2016

Mr. Royston, how much of a down payment?  If the guy has money to put down, why even do a lease.  Now, who’s to say that the seller is wanting to finance it?

David Davis on 11/28/2016

Jimmy Royston,
This is how it is commonly done, but there are restrictions to that as well.  Such as maximum number of financed properties by the seller, and having to get someone to process and underwrite the seller’s loan.  Generally a small fee is paid to a third party underwriter/processor for this service.

Jimmy Royston on 11/28/2016

Instead of a lease purchase, if the lessee is intent on purchasing the property couldn’t it simply be handled by doing a sales contract with a seller finance?

Mike McEwen on 11/27/2016

Mr. Davis, I believe we are on the same page.

David Davis on 11/27/2016

Mike McEwen,
Yes, Provided neither is subject to the other, and provided the lease expires within 180 days from it’s start date, and it does not get renewed.  (That would make it an Executory Contract).  As you have stated, do NOT mention the lease in the purchase contract. or the purchase in the lease, although I must say, I wonder if non-disclosure of a material fact isn’t an issue here.  These cases are often settled by effect intent.  You’ve heard the old saying if it walks like a duck, talks like a duck, well, it’s probably just a…. well, you know…. a duck!  I don’t care what you call it, it comes down to what happened.  Judges & juries have tendency to get real angry when someone insults their intelligence with fancy made up stuff to try to get around laws.

Mike McEwen on 11/27/2016

Mr.  Nguyen, do not put that language in SPECIAL PROVISIONS.

Mike McEwen on 11/27/2016

Mr. Rozell, you can write them so that they essentially synchronize, but do not make reference in either form to the other.

Mike McEwen on 11/27/2016

http://www.lonestarlandlaw.com/Lease_pur.html is an excellent article but does not really address the preparation of a lease contract and a purchase contract.

Mike McEwen on 11/27/2016

In preparing the lease contract and the purchase contract there is no reason to put anything in SPECIAL PROVISIONS.

Mike McEwen on 11/27/2016

Mr. Davis, both the lease contract and the purchase contract can stand on its own w/out being tied to the other.  Other real estate attorneys have acknowledged this.

Mark McNitt on 11/23/2016

We as Realtors need to advise on what is the best course of action for our clients.  If a buyer is trying to do a lease-purchase, they likely are NOT ready to buy financially and we need to simply tell them this.
Its the “perfect home”, “low price”, “willing Seller (likely without a Realtor!!!), etc…  I tell my often young Buyers that there will be other opportunities.  Lets find a nice, affordable lease property so they can save money and work on their financial situation.  Get ready when that next gem pops up on the market!  I remind them they could always purchase this rental home if the landlord wants to sell later with a normal mortgage.
I also remind my clients that many times this is an outright scam.  Asking for large down payments in the form of a wire transfer and then the “Seller” disappears.  Later to find out the person they were speaking with from Craigslist did not own the home.

David Davis on 11/23/2016

Binh Nguyen ,
NO!  That would be an Executory Contract.

Binh Nguyen on 11/23/2016

Can we prepare a regular lease with a simple notation in SPECIAL PROVISIONS that the tenant has the option of purchasing the property at the end of the lease term?  We will then prepare the purchase contract, using the TREC purchase contract at around the end of the 11th month of the lease term

David Davis on 11/23/2016

Michael D. Rozel,,
Yes, Provided: The purchase is not optional and it finalizes no later than 180 days later.  We commonly do this all the time with temporary residential lease agreements when the seller is not ready to move out. on closing day, or the buyer wants to move in before closing day.

Michael D. Rozell on 11/23/2016

Cannot an agent or broker write a lease agreement on a property and a purchase contract on that same property with the two tied together?

David Davis on 11/23/2016

Faye Taylor,
No, they are legal.  They just have to done by an Attorney.  The problem is that most people that need these types of deals often are cash poor, and these types of deals are going to require considerable cash.  Attorneys don’t typically work for free, or cheap.  There is a lot of work involved in the process.  Then you or I (REALTOR) have to go and find a seller that is willing to participate in the transaction (that’s not always going to be easy in a strong seller’s market), and oh by the way, remember we can’t be involved in the contract so guess what, that Attorney is likely to write us right out of any commission.  See where this is going???

Faye Taylor on 11/23/2016

It is my understanding that lease purchase in Texas in not legal.  There are specific laws governing time frame of less than 180 days, etc that are hard to meet.  So it is not a good idea to even attempt as you can easily not meet those time frames and then you are in outside the law requirements.  This is a link that has further info.

http://www.lonestarlandlaw.com/Lease_pur.html

Candy Cargill on 11/23/2016

Do not, I repeat, DO NOT attempt to figure out a way to do a lease purchase, lease option on the TREC or TAR forms using Special Provisions or anything other way.  You are just asking for not only a lawsuit, but a TREC complaint that would end up with you possibly not being able to practice real estate in the Great State of Texas. If those in other states want to jump off a cliff, are you going to do the same? I hope the answer is “NO”. We here in Texas protect Texans and their private property rights and homestead laws.  The rest of the 49 could learn a bunch from us.
Proud to be a TEXAS REATLOR!!!!

David Davis on 11/23/2016

Mike McEwen,
What you are talking about “synchronize” is the very thing that makes them problematic.  It makes them what are called Executory Contracts.  TREC does not like Executory Contracts for one simple reason.  TREC is a consumer protection agency.  Executory Contracts are more often than not very consumer friendly.  For this reason, TREC will never allow them.
Executory Contracts can be done, but must be done by an Attorney.  There are all kinds of provisions in the Texas Property Code that have to be met to make the transaction legal.  Most of those provisions are far outside the scope of a real estate licensee or REALTOR®.  Refer them to an Attorney and move on.  Happy Thanksgiving!

David Davis on 11/19/2016

ghyasuddin syed,
No, You need to consult a REALTOR® who has commercial experience.  My phone number is still the same.

ghyasuddin syed on 11/18/2016

need more advice for buying a retail strips should consult attorney?

Mike McEwen on 11/18/2016

I have always found the TREC & TAR forms to be fair and balanced; and I do not mean that in a Fox News way.

David Davis on 11/18/2016

Randy Waterman,
It’s a case of what each state considers the practice of law -vs- the practice of real estate brokerage.  Texas has long been known for it’s last to confirm attitude in catching up with the rest of the Country when it comes to it’s real estate and lending laws.  I suspect it has to do with the values that we hold so closely and dearly.  They are tied back to our early history and the Child Labor Law that later helped to form our Homestead Law and now the law the basically frowns upon what amounts to an “Executory Contract”.  Texans just don’t like anything that takes advantage of Texans, and more often than not, these Executory Contracts do just that!  For that reason alone, TREC will never allow them!  We are members of TAR and every other Lobby group in the world can jump up and down till we’re blue in the face, but TREC is a consumer protection agency.  They always have been, and always will be.  They also have oversight on the laws that govern real estate brokers and licensees.

Mike McEwen on 11/18/2016

It is possible to prepare a purchase contract and a separate lease contract and they can be made to synchronize.  That would not be a violation.

Randy Waterman on 11/18/2016

I’m not sure why attorneys in Texas seem to be scared of real estate Brokers taking away their business but as a licensed broker in Texas and California I have prepared a number of lease purchase agreements in California with no problem at all.

Glenn Still on 11/18/2016

On anything like this- please think about what could happen in a court. If the first lawyer made a mistake they could be sued and would probably be covered by their E&O. If you use the same form with a second client and something goes wrong you could be sued and your E&O would probably not cover you at all. The first attorney could have made a mistake that simply did not cause a problem in the first transaction but may in the second.  Also laws could (and often do) change over a period of time. The client should also have the opportunity to actually talk to the attorney so they can understand the paperwork. Never attempt to use some document an attorney drew up for someone else. My experience with watching other people working thru lease purchase is someone always seems to misunderstand how things are going to work and feels cheated. It would have a higher chance of lawsuit than standardized transactions. I would be very careful.


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The material provided here is for informational purposes only and is not intended and should not be considered as legal advice for your particular matter. You should contact your attorney to obtain advice with respect to any particular issue or problem. Applicability of the legal principles discussed in this material may differ substantially in individual situations.

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