Clarification on lease with option to buy

Hello, good day to all, i am a novice investor and i would like to obtain some clarity in regards to the dynamics of the lease with option to buy.

  1. I have read that you should obtain a large non refundable fee (similiar to a security deposit ) as earnest money for option to purchase
    In addition my second inquiry is that if i receive option money of $1800 for 12 months and the renter/potential buyer opts to purchase the home, is it mandatory for the option money to get subtract from the sales price
    (Eg. If the sales price of the home is $290000, would the new sales price be $268400)
    Note: The lease with option to buy purchase would be for the duration of one year.
    Thank you all for your considerations and feedback

If your contract states that option money will be applied to the purchase price, then yes.

$1800.00 is a small amount for option money. Is the area hot?

Hi,ScorpioGirl, the numbers that I presented were hypothetical, according to your respsonse, correct me if I am incorrect, the option money unless mandated in the contract does not have to be deducted from the sales price…, thank you for your response, also this question maybe foolish, but can you set up the lease option contract or add an addendum stating the if the person opts to purchase the property, that the option money is not guaranteed to go towards the purchase price? or would this suggestion basically violate the premise on which as Lease with option to buy contract is based???
Also i guess i explained my self wrong what i meant by option money in the prior post i meant monthly payment to myself or my business entity?? the $1800 hypothetically would be monthly payment??
One more question, how much Option money should you accept on a lease to option contract
should it be the equivalent to 2-3 month mortgage or rent payment(similiar to a security deposit) or would asking for this amount be too excessive)
and to answer your inquiry, i am novice investor so i am not sure if my area is hot, I am still investigating this myself
thanks again

From what I understand, most sellers will try to get 5K option money. You have to know what the needs of your tenant are. If they can’t come up with 5K on the spot, but can add extra to a few months lease payments, tack on a few hundred each month until the option money is paid in full. You could also lower the option money if you so choose.

You’re in investing to make money, but don’t forget that people are asking you for help when they call you - in most cases. It would be in your best interest - imo - if you were to make it as black and white for people as possible. Lay it all out on the table and don’t try to hide anything in “fine print”.

Here is my example:

Cost of home: $150,000
Option Money: 5,000
Monthly pymt: $1200 - $1500

All option money applies to purchase of the home.
$100.00 per monthly lease payment applies to purchase of the home.
If late - even one day - the $100.00 for that month will not apply to purchase price.

That’s a basic scenario that is fair for you and the buyer.

thanks alot for the information, you have provided much clarity, i have one more question, is there are formula or a percentage that you can implement to determine how much option money you should expect or demand??
For example should it be 1-3 percent of the sales price of a property?
thank you for the prompt and clear responses

Hello again, I understand the the $5,000 option money would go to the purchase price, but does the $1,200 that the potential purchaser pays per month/rent becomes automatically deducted from the sales price as well?? (if person opts to purchase)
I am sorry if i am repeating my inquiry, but I believe that my understanding is still somewhat skewed.

Howdy Wealthinvestigator:

In Scorpio’s example she let $100 of the monthly payment be applied to the ultimate purchase price if made on time. It is always good practice to let the original down-payment/option money be applied to the purchase price if in fact they do buy the property.

The amount of credit given each month is up to you and the tenant/buyer. Some amount is generally used as an enticement to get a tenant/buyer in the first place. I would look at ads in your area to see what other investors are doing. You may want to do the same as your competition and get your deal done faster.


thank you for your response Tedjr, have a great day and continued sucess in your investing endeavors