Two contracts on a rent-to-own. Who drafts them?

Question

I put money into other people's deals and read their documents, so I'm coming at this from the paperwork end rather than from operating. A sponsor I look at is starting to offer rent-to-own on a handful of houses he owns, and separately he wants to do it on two houses he doesn't own where the owner would pay him.

What I don't understand is where the licensing line sits. Marketing a house you own yourself seems like ordinary owner activity. Marketing someone else's house and getting paid a piece of it sounds like brokerage to me, but he says the lease option structure means he's a principal and not an agent. I'd like to know what actually triggers a license question, because if he's wrong that's a problem for everyone in the deal.

Second, more mundane question. Who writes the lease and the option agreement in practice, and what does that cost? Are there template packages people use, and does anyone pay for software to track rent credits over a 36-month term, or is that a spreadsheet?

Rena Guide · Accepted Answer

The general shape of licensing law in most states is that acting for another person, for compensation, in a real estate transaction is brokerage activity and needs a license, and doing the same thing for your own property usually doesn't. So your two cases split roughly where your instinct puts them. His houses, his own advertising, generally owner activity. Someone else's house where he collects a fee for finding a tenant-buyer or negotiating the sale, that's the fact pattern that looks like brokering to a state commission. Some states also treat collecting rent for an owner as property management requiring a license, and the definitions and exemptions differ state by state, so the answer has to come from the licensing statute in his state or from an attorney there, not from a general rule.

The argument that a lease option makes him a principal only holds if he actually becomes one. If he takes a master lease on the owner's house with his own option to buy, and then sublets to a tenant-buyer at his own risk, his money is in the deal and he's contracting in his own name. If he's just introducing parties and taking a slice, the label on the paperwork won't carry much weight.

On drafting, a local real estate attorney typically writes or reviews the lease and the option as a pair, often flat fee in the several hundred to a couple thousand dollar range depending on market. Template packages sell for roughly $100 to $400 and still need state-specific review. Tracking is usually a spreadsheet, or the credit ledger inside whatever property management software already collects rent, which for a handful of doors runs somewhere around $20 to $60 a month.

Ask him where the option fee is deposited. That one answer tells you a lot about how carefully this is being run.

bmoreno23 · Answer

Coming at this with no background, I assumed rent-to-own was something realtors set up. It's odd to me that the person selling the option is usually the same person who owns the house and there's often nobody in the middle at all.

mikeoconnell7 · Answer

@ember agents mostly stay away from these because the commission timing is awkward. If the sale happens in three years, who gets paid and when? A few brokerages will list a rent-to-own but they want the commission at lease signing, which the owner usually doesn't want to fund.

joe_delgado5 · Answer

The fee-for-finding-a-tenant-buyer thing is exactly what gets people letters from a state commission. If your sponsor wants to be a principal on those two houses he should take the master lease and have his own option. Costs him more, and it's an actual position instead of a referral he's dressing up.

samantha_ruiz · Answer

Second what flint said. Once he's on the master lease he's also on the hook for the rent whether the unit is occupied or not, and that's the part people skip when they say they want to be a principal.

stephen_ok9 · Answer

On the tracking question, the failure I'd worry about isn't the software. It's that 36 months of credits get recorded in one place and the settlement statement three years later is prepared by a title company that never saw it. Somebody has to own reconciling those, and it's usually nobody.

megan_doyle15 · Answer

What's a master lease in this context? I've seen the term twice today and I'm not sure if it just means a long lease.

carlos_nunez · Answer

@rigging you lease the whole property from the owner at a fixed rent, then you sublet it out and keep the difference. Often paired with an option to buy the place later. On a single house it's small, on a building it's how people control 20 units without a down payment. Your risk is the fixed rent you owe every month regardless.

derekj19 · Answer

Is there a service that handles the tenant-buyer side specifically? Credit repair plus a savings plan plus the mortgage handoff at the end. Feels like an obvious business and I've never seen it done well.

dmitri_v6 · Answer

@canton on the deposit question the guide raised, I'd go further and ask whether the option fee is even mentioned in a bank statement anywhere. I've read three of these agreements where the fee is described as "paid to seller" with no account named. That's fine legally in most cases and it makes any later dispute about the amount a swearing contest.

luis_carrera · Answer

The commission timing point from lantern is interesting. Does the listing agreement even survive a three-year option period, or does it expire and leave the agent with a claim nobody documented?

Two contracts on a rent-to-own. Who drafts them?

12 replies