I currently own a townhome that I will be renting for $1200 per month with a 1 year lease. One couple that is interested will want to stay for a few years and then have the option to buy. They want some of the rent money to go toward the purchase price. I’ve never thought about a deal like this, but the couple are both teachers and want to stay awhile, so I’d like to make an effort to make it attractive for them.
Initial thoughts:
1 year lease @ $1200 per month
1 year lease @ $1250 per month
1 year lease @ $1275 per month
Option to buy after 3rd year @ fair market value with $250 per month paid credited to purchase price.
Any opinions on this structure?
Who determines FMV after 3 years?
Are there other options for this couple to feel like they are building equity as they go?
Thanks all.
In Conti&Finkel’s L/O book, they have some pretty good tips on structuring these types of deals.
Who determines FMV after 3 years?
You do. No one has a crystal ball, so your guess could be just as good as anyone elses. Just determine how well the market has been doing, and try to forecast appreciation rates based off of that and other information. For example, if appreciation rates have been 5%/year and you don’t see anything that would indicate this would change, use it. Just make sure to base the annual rate to the term. So, three years at 5%/year would be: 1.05^3, or 1.157625 times the FMV of the property today.
One tip C&F use is to NOT use the FMV at the end of the term, but to knock off a percentage (or dollar value) in order to make the future equity a good reason to buy. IOW, if the house is worth $250,000 today, and market appreciation shows it being worth $275,000 in three years, use $265,000 as the option price and tell the buyers they’ll have $10,000 worth of equity as soon as they exercise the option!
A lot more tips are in the book to like rent credits, etc.
Thanks very much for the tips - I will locate and buy that book right away.