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Written Sale Option Is the Best Policy
Question: Two years ago, I verbally agreed to sell my house to a woman and take back a mortgage for 15 years. She wanted to rent it for a year before buying. I agreed. The rent is the "going rate" in the area. I said if she paid rent on time and kept the house well-maintained, I would deduct "something" when she finally bought. She is still renting and doesn't know when she will be able to buy.
If she doesn't buy for several years, am I morally obligated to sell at the original price? How much of her monthly rent should be allowed as a rent credit when she buys (no down payment was made)? Would it be better tax-wise not to allow a rent credit and just lower the price of the house?
Answer: What a mess. The general rule is that the statute of frauds requires all real estate contracts to be in writing to be legally enforceable. However, an exception occurs if one party (your tenant) relies on an oral contract (the verbal lease-option) and enters into performance of her part of the contract. By moving into the house and paying rent on time, that partial performance and detrimental reliance takes the lease-option contract out of the statute of frauds writing requirement.
Unless you have raised the option purchase price, the original price still stands. As to how much of the tenant's rent credit toward the purchase price should be allowed, that's up to you and the tenant to agree upon.
Personally, I give 33% rent credits. But I know other rental owners who give only 10%, which I think is too little to motivate the tenant to buy. When the purchase option is exercised, the rent credit is subtracted from the gross sales price, similar to a sales expense.
You should immediately consult a local real estate attorney to prepare a written lease-option so there is no further possibility of a misunderstanding. If you don't, your tenant might sue you for specific performance of the alleged lease-option, based on her understanding of the oral agreement, after the house has gone up in market value.
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Letters and comments to Robert J. Bruss, a San Francisco-area lawyer, author and real estate broker, may be sent to 251 Park Road, Burlingame, CA 94010. Bruss suggests consulting an attorney or tax advisor before making important real estate decisions.