Are there any “other” expenses I should have in mind when I do a lease option?
As long as the buyer’s monthly rent payments to me exceed my monthly mortgage payments…and THEY take care of all maintenance and repairs…and THEY pay all utilities and pay me for taxes and insurance…is there anything else?
Their rent to me $1700
They pay taxes, insurance, utilities, mainenance and repairs.
Am I missing something?
I’ve heard some say that lease optionors cannot require the tenant-buyer to pay for maintenance and repairs. Anyone have any experience with this?
Also, How do experienced lease option sellers structure their deals, in terms of repairs, amount of option consideration, final purchase price, etc. Any formulas?
Most states have laws that forbid the LL from shifting certain costs to tenants (e. g. maintenance and repairs). Lease options muddy the situation by creating a LL/Tenant relationship and a seller/buyer relationship, but it’s not a problem unless it actually goes to court. The more you treat the TB as a buyer, the more likely the court is to rule the transaction a sale instead of lease. That means you foreclose instead of evict and the TB gets an equitable interest in the property, which could mean he gets all the appreciation from the time the lease option was signed.
The general rule with lease options terms is don’t use them if it wouldn’t fly with a normal rental agreement. You can write whatever terms you want, but the judge can rule however he wants and if he doesn’t like you or doesn’t like the way you treat the TB, he will rule against you. He can ignore the terms by calling them against public policy and you have no recourse. Keeping the lease agreement separate from the option agreement helps, but the TB will bring it up in any dispute and no one knows what will happen.
Keep it simple. The purchase price is your best guess of the market value of the property at the end of the lease term. Taxes and insurance become part of the monthly rent. Damage done by the TB during the tenancy is repaired by the LL and charged to the tenant, just as if it were a rental only agreement. Work normally the responsibility of the LL is added to the sales price if/when the TB actually buys it. Making the TB pay immediately implies he is a buyer and not a renter. Personally, I don’t trust tenants to do any work and you are the one who has to pay to redo the shoddy work if they don’t exercise the option. Some people say use a refundable option fee or none at all to avoid the equitable interest issue. That’s a nice idea except that it takes several thousand dollars out of your pocket if they don’t exercise. It’s your call to take a non-refundable fee. It depends on how much risk you are willing to take. Remember that the judge decides what happens, not the contract. Stick to normal, boring terms and you are more likely to prevail than if you push the limits using exotic interpretations.
Would a judge look more favorably on the deal if you were to “credit” a portion of the monthly rent to the buyer if they eventually exercise their option to purchase. I like your other suggestions…very helpful.
That makes it look more like a purchase. I would use something like Jeffrey Taylor’s home buyers program where you credit the tenant’s account for every month the tenant pays on time and every time he passes the bi-annual inspection. If the tenant pays late or fails the inspection, the pool resets to zero.At the end of the tenancy, this credit would apply to the purchase of a home where the LL has a deal with a local builder or RE agent to eat the credit if the tenant buys from the builder or uses that agent. You aren’t selling the property to them. You are giving them some money to use if they buy from someone in your network.
For lease options, you must eat the credit unless you increase the rent to pay for it. To be safe, you can use a local RE agent as part of your program so that the credit can be used elsewhere. The key is to keep the rental agreement separate from the option.