Dear Real Estate Adviser,
I couldn’t sell my house when it was on the market four years ago, so I found renters to sign a lease-purchase contract. Unfortunately, they’ve fallen months behind and often make only partial payments. They told me they couldn’t get a home loan to pay it off. What would be the best way to proceed? Will I owe them any money when and if they leave?
— Mina A.
As with other nonperforming tenants, you probably have the right as a landlord to evict the occupants without any financial obligation — all within the constraints of your local tenancy laws, of course.
You don’t say what your agreement with the tenants states, but in a lease-purchase — also called a “rent-to-own” or “rent-to-buy” agreement — the renters-buyers typically pay an additional monthly premium above their base rent. In effect, they “buy down” the price of the home. In many such deals, the tenants pay an additional upfront sum larger than a typical rental deposit to serve as additional down payment.
Barring contract language that obligates you to refund their down payment equivalency monies, you likely owe them nothing but a notice to vacate. (However, you may have to pay back the part of the initial deposit that was considered a damage deposit.)
In most such lease-purchase contracts, the renter’s nonpayment equates to a default on the deal. Unfortunately (or fortunately, depending on the owner’s perspective), the majority of lease-purchase deals are never fully executed for the very reason your tenant states: inability to get financing. With good intent, purchasers believe they can get their finances straightened out after “X” amount of years, but don’t or can’t.
In your situation, many landlords will inform the tenant of the amount that’s due to pay off — or “cure” — the default sum, including late fees. Sometimes, landlords will offer the return of a cursory sum of money upon final inspection of the premises before tenants depart, in hopes of staving off potential damage that the occupants might inflict on the property on their way out.
As alluded to before, landlords are legally obligated to return damage deposits in some localities even if tenants were in arrears. Again, you will want to check you area’s landlord-tenant laws. Some states, including California, have more rigid tenant-protection laws. (Since you are already out hundreds, if not thousands, of dollars in missed payments, I imagine your motivation to be charitable will be minimal.)
If you decide you want to pursue back rent, you could go to small claims court, then file for an “execution” that would attach the tenants’ wages or bank accounts, assuming that type of maneuver is allowed in your state. A judgment against the lessee(s) would stay on their credit reports for up to 10 years.
On a side note, unless your agreement was a “lease option” where the tenant was obligated only to lease the property, a default on the lease would also technically be a default on the purchase as well. However, that part of the agreement would be much tougher to enforce.
Good luck in eventually getting these nonpaying “buyers” out of your house. Here’s hoping you can sell the place flat-out this time when the dust settles.
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