lease option 101 questions

General Real Estate Investing
1

  1. how to determine a monthly price to offer for TBers? lets say if we are paying 1000$/month for the property.

  2. over the leasing period, what % of the TBers purchasing price should we set up for the TBers to pay off? (for example if we set the purchasing price for them to be 200k, do we set up so that they pay off 10k? 20k?)

2
  1. Terms are based on the market. What will your market find an acceptable rent?
  2. Are you talking about rent credits? If so, these are set, again, by the market. Are you in a buyers market, for example? Then a bigger rent credit will be used to attract potential t/b’s.
3

i see. i have noticed that many of your deals (or the ones at NakedInvestor website) have a 50% rent credit to TBer. this is ok in the short term, because you priced the home so that when they do buy it at the end of the lease option date, you still make some money. what happens when they want to extend the contract at the end of the lease period? you negotiate a different rental credit % to be applied? or simply increase the final sales price of the home?

4

BFC,
You have to realize that the rent credit towards the purchase price is in fact part of the purchase price. Your profit on the sale is driven by your negotiated sale price and cost basis, not how much you are crediting towards the purchase each month. If at the end of the option period the tennant wishes to extend then this is an opportunity to require another option fee be paid since you are transferring rights to the tennant.

5

hmmm…any guidelines as to price option fee? i have noticed some people price it at 1.5 % - 2.2% of the total value. for 12-24 months.
also, based on what you said, we charge an option fee every time TBer extend, that means the longer we option it, the higher we charge for option fee, correct? ie. if we give them a 3 year option, we charge them triple the amount if it was a 1 year option.

6

With rare exception the deal between you and your t/b should be limited to 12 months. If, after that time, they want to extend for any reason, you are negotiating from a position of strength. You can extend if you care to, but there is no need to give further rent credits at that point.

7

BFC,
An option is a valuable financial tool, used in many industries not just RE. The value is determined in part by the length of the option period. The longer the option period the more you should be charging for the option. The option fee is compensation to you for transferring the right but not the obligation to purchase the property at a set price. After the option expires and your tennant wishes to enter into another option agreement you start the process all over again.

8

thanks!
I heard people charge TBer a 1-3% down payment depends on the market. plus an option fee. that seems like a lot to me for rent to own.

9

remember that if you are marketing effectively you should be getting calls about your place from people with less than perfect credit, meaning you are their only hope of home ownership. As with any negociation start with a scenario thats most beneficial to you and work to compromise. For example: you pay 1000 a month for the place and have the option of buying at 200,000. Tell your new T/B its 1200 a month for him with 5000 nonrefundable down up front and the option for him to buy for 210,000 at the end of the term.

If he agrees then you’ve got a deal, if not then work with him. Just make sure you’ve got positive cashflow and his option is a bigger number than yours in case he actually lasts that long.