L/O payments above market rents

How much above market rent would a L/O buyer pay?

I’m selling a $200k house on L/O. Market rent is $1400 but my mortage is $1600. I give a 12 month L/O with a $10,000 option fee (5% of price) to go toward downpayment. I’ll take $5200 upfront and $400/mo over market rent to apply toward option fee/down payment (after 12 months thats $4800 which totals out to $10,000).

Would this be attractive to a L/O buyer? $5200 up front and $1800/mo on a $200,000 property?

Thanks for your help!!!

You really want to get about 5% downpayment upfront, at least the lowest should be 3% since they probably have bad credit… If your mortgage is $1600 a month you want to cover that. Now lets say that $1600 includes taxes and insurance (dont forget them) you would probably want to ask for about $1850-2000 a month. The offer them a credit from the $1600 a month, so say they give you $1900 a month, after 12 on time payments you will credit them $300x12= $3600…Now they already gave you say 5% down so thats $10,000 + 3600 rent credit =$13600. now they need to secure financing for $186400… Remember to start high, you can always go down, but never up…

Object is to collect the most in positive cashflow each month till they buy…Remember more than 50% of all L/O never get completed and the buyer usually walks away or wants an extension because they do not quailfy… So now say they can not get financing after 12months are up, you can renew and negiotate a new sale price and terms or tell them to leave and start over with a new tennant which is actually better since you just made an extra $13600 on your property for the last 12 months…

thanks! that helps a lot!

In regards to pricing the L/O property initially, say I have a property that appraises at $238,000, how much above market value or at market value, would be good on a 12mo. option?


depends on your area market appreciation and what you want to charge…is your market strong with appreciation or slowing?? also you can always come down on the sell price when negotiating the sale price now…
I have properties all over florida and each market is different for me, some areas i can justify only 5% because its slowed, others are still strong and i can get 15%…

This property is in a pretty popular area, a lot of growth is expected for the next couple years. I’m into the property $216,000 but I would like to net at least $20,000 at least after all said and done. I thought about listing it for $245,000 possibly $250,000 on a 12mo. option. Other people in the area that are up on Real Estate estimate a value of the home to possibly be $260k-$280k by the end of the year. Its a brand NEW home, and I’m trying to keep it appealing to a buyer so I’m not being greedy and putting the option at 260k-280. My payments are aprox. $1500 mo. and I would like to at least cover that and possibly +cashflow. My ad starts in the paper tomorrow and I would like to have a good idea on what to ask and how much to negotiate. (by the way this is my first L/O if you couldn’t tell.)

Well 1st you need to know what the property is worth now. Since its a new home, one good way if you do not have an apprasial is to see what your builder is charging now for a new home to be built in the area with the same size/features…

Lets say your home is worth now 240K since you paid 216K and hopefully you have about 10% equity, though on preconstruction many times your closer to 15-20% equity at completion.

Home worth 240K today, now say your market is appreciating at 8%, then thats another $19200…so that bring your house to $259200… (still below what others are telling you). If these look like accurate numbers (remember I do not know your market so you need to calculate the percentages right) then I would ask for at least $255K…remember in a L/O the seller is buying with the hopes the home will appreciate more than your figured and they plan on having solid equity in it but also many of your l/o buyers are not the smartest guys since many have bad credit…

Now get a 5-10% downpayment based on the 255K and tell them the rent will be $300 a month over your holding cost. Your object is to increase your cashflow at first. lease options command higher rents since its homeownership involved. If they argue alittle, you can always offer to give them a $300 a month credit at the close…do not offer, wait to see if they ask or want some credits…feel the person out…do not L/O for negative cashflow…its not smart really…

Solrak & JRyan,

Since this is your first lease option, there is much you should be aware of before committing yourself to this type of transaction. I don’t want to be a party pooper but you should have this information available. Lease options are great for the buyer. Anytime you are on the Seller’s end of the lease option, you are taking a big chance.

It is a myth that you can get much higher rents with lease options because the “buyer” really has no homeownership benefits other than an option to buy at a later date. He has no tax or interest writeoffs and no share of future appreciation.

Sellers often seek to combine the advantages of leases with sale transactions by structuring their sales as lease options (as you have done). However, the purchase/lease/option hybrid financing does not exist. A transaction is either a lease or a sale: NOT BOTH!

In a genuine lease with an option to purchase, neither any portion of the rent nor any option money paid applies toward the purchase price upon exercise of the option. If money paid by the tenant for rents or option consideration is applied toward the price, the transaction is not a genuine lease with a purchase, but is a disguised carry-back sale - a land sale contract.

The courts can easily re-characterize purported lease options as disguised sales, exposing sellers to all the consequences of mortgage law. If the lease option is found to be a disguised sale, the tenant is re-characterized as a buyer who builds an equity and has an ownership (EQUITABLE) interest in the property.

The seller may not simply evict a defaulting buyer as he could a tenant. The buyer’s interest can only be terminated by judicial foreclosure, since the lease option seller has no trust deed power of sale provision. Also, if a lease option is re-characterized as a sale, the transaction will have been improperly reported for federal and state income tax purposes, and the property will be reassessed based upon a change of ownership.

In addition, some states have some squirrely rules to follow. Texas has banned lease options and Arizona is very strict. Here is a list of five things that may violate the law and cause the judge to classify the transaction as a “disguised sale”. This is not my list, but the list prepared by a Judge in Arizona who actually co-authored Arizona’s landlord/tenant laws (this is direct from the court transcript):

  1. Collection of more than 1.5 times the monthly rent as Option Deposit.

  2. Collection of an Option Deposit or Rent Credit to be credited to a Purchase, or to discount the Purchase as in a Down Payment.

  3. Predetermining a Purchase Price, as in delaying or disguising a sale.

  4. The Lessee also holding an option on the same property they are leasing regardless if it is one document or two separate documents. (Sandwich lease)

  5. The Lessee being responsible for maintaining the property.

If the lease is not recognized by the court as a lease, it doesn’t get the benefits that go along with a legally recognized lease. If the judge feels a sale has taken place instead of a lease, the rules governing foreclosures will apply. For this reason, possession of the property will be decided by a judge in position to decide matters of title and the process can be extremely expensive. Costs can run $10,000+, not including having to pay the back mortgage payments during the life of the suit.

Be very careful and good luck to you.

Da Wiz

I live in the Salt Lake City area. Here’s a breakdown on this property: I locked in my price at $196k in Oct. 05’ I put about 15k in upgrades(they come very standard otherwise) and I paid close to 5K in closing. This house was completed last week, and that is when I got the last appraised value. (238k)The same model of home I have, is base priced at 225k and that is with no upgrades (not even central air) So the home has roughly gone up in price by 29k since Oct. 05’(196k) to today.(225k) From talking to other people that know our market pretty well, the growth and appreciation is expected to be some of the best in the state. Though they’re predicting 260k-280k+ within a year, that is still speculation but, not unreasonable. So do you think 5%-10% down is about right? It seems like a lot, but I do want to have my ends covered and if they’re serious about owning it I’m guessing they would have money for a down payment. I appreciate all of the help you’ve given me so far. Thanks,