Can You Evict Rent to Own Tenants?
July 13, 2018 by Marty Orefice | Rent to Own, Selling
In every industry you choose to invest, there will be people who try to game the system. There are parents at daycares who are consistently a few weeks behind on tuition. There are people at restaurants who like to pull the “dine and dash.” And there are tenants who pay their rent late or sometimes do not pay at all.
Unfortunately, the rent-to-own field – as alternative as it is – falls under this convention. While the majority of people will pay on time, there’s a handful of people who for one reason or another will not.
Can You Evict a Rent to Own Tenant?
While most people know that landlords can evict their tenants, fewer people realize that sellers who have signed lease-options can evict their potential buyers too.
Part of the rent to own contract involved the tenant paying rent each month. As soon as the tenant doesn’t do that, they are breaching the lease-option contract. Therefore, you have the right to evict them. They’ve basically forfeited their right to buy the home, and now you should deal with evicting them in the sense you would any other tenant, as per your state’s laws.
Every state will require you to post a three-day notice before you can evict a tenant. Don’t delay doing this. A three-day notice means your tenant has three days to pay rent before you start the eviction process. You must give that tenant three days worth of warning.
The great thing about these warnings is that they’re often sufficient encouragement for a tenant to make the rent payment, and you won’t have to go through the eviction process. Evictions aren’t free. You have to pay the government to go through them, so if the three-day notice encourages your tenant to pay, it is a good thing.
At this point, it’s your choice whether to give the tenant back the right to purchase the property, but it would be the right thing for you to do so, ethically. More so, if you do, you won’t need to go through the trouble of finding a new buyer, which can be a lengthy and burdensome process.
There are several misconceptions that you have to be aware of before you evict a tenant.
The Seller Keeps the Option Fee
The seller keeps the option fee whenever the buyer defaults or backs out on the contract. Traditionally, the buyer will back out by choosing not to exercise the right to buy the property. However, nonpayment of rent is a breach of your rent to own contract.
The buyer agreed to pay you a certain amount of money each month by a set date. Technically speaking, the seller has the right to keep the option fee even when a tenant pays late by a few days because it is a breach of contract. Most sellers will opt for a late fee, but the right remains.
Therefore, if you make it into the eviction process, you certainly have the right to keep the option-fee – and you should. Considering that the buyer will not purchase the property if they are evicted, you will need to spend time looking for a new buyer. The option fee is intended to make up for some of that lost time.
While some people feel guilty about keeping option fees from evicted lease-option tenants, you should not. Rent to own has great benefits for both sellers and buyers. Most things that come with high rewards involve a certain amount of risk. Honestly, rent to own has lower risk than most for buyers because they have almost complete control over the outcome – barring emergencies and changes in the economy.
Nevertheless, the risk of losing the option fee is one that the buyer knew when they signed the lease-option. The buyer knew the consequence when they decided not to pay the rent. It’s a risk they knew when they chose not to save money for rainy days when they might need it to pay rent. More so, if the buyer was truly on the path to purchasing your home, they would have had money saved up for the down payment that they could have pulled from to cover rent.
Don’t feel guilty for keeping the option-fee. You’re not taking advantage of anyone. More so, if an evicted tenant/buyer pushes to keep the option fee, they’re trying to take advantage of you.
The Option Fee Doesn't Cover Rent Payments
In traditional rentals, tenants often try to claim that the security deposit can cover their last month’s rent. That’s untrue. The purpose of a security deposit is to cover the cost of damages that the tenant causes. Should there be no damages, the tenant gets that deposit back after he or she moves out, but there’s no guarantee before then that the property won’t have damages. Also, rent is due before the month begins NOT after they’ve lived in your property for a month. Using a security deposit to cover rent is taking away the purpose of the deposit.
The same is true of an option fee.
Using it to cover rent takes away from its purpose. The tenant/buyer paid that option fee to have the option to purchase the home. They don’t get it back until they actually purchase the home. If they don’t purchase, you keep it. At a point when your tenant is still paying rent, they haven’t bought the home yet. Therefore, they cannot touch that option fee.
This is especially true if you’re in the process of evicting that tenant. In that scenario, that option fee is your property. Any rent payments for months the tenant lived in the unit is yours too. You’re entitled to both.
Should you have to evict a tenant, make sure you get the payments that they were missing. You can send them to collections or take them to court to push for it, if you need to.
Front of House by Mike on Maui is in the Public Domain.
