I am in a unique situation where I would like to move out of my house. However, I dont nessecarily need the money right now and would like to sell the house on a 18-24 month lease option.
Ive been reading up on Lease Options, trying to figure out how they work, what to expect etc. I understand that I should collect option money up front, usually 2-4% of the purchase price (is this the price I will sell it for in 24 months or the price it is valued at now?). I have also read that this option money, plus the option money that you collect each month through the monthly payments all go towards the down payment of the home. Does this mean that I need to refund this money to the buyer and the end of the option so that they can pay the bank the down payment?
Most of my questions stem around the time when the lease option is up and the buyer wants to exercise the option.
Lets say that my home was recently appraised at 100k, I work out a deal to lease option the home and sell it in 24 months for 103k. I collect 3k up front in option money and over the course of 24 payments, assuming that I get $200 of option money I was able to collect a total of $4800. So now this buyer has $7800 to go towards a down payment for the home. Would I just say that the purchase price is $95200? I just am not understanding how this work when the bank gets involved.
If they go to the bank and ask for a loan for $95200 they are still going to have to pay the bank a down payment correct?
Thanks for helping me understand this better, I think this could be a great way to sell my home, avoid realtor costs and make a little extra money on the side.
For starters,from the seller’s perspective, you’re better off keeping the length of the deal limited to one year. If the tenant/buyer is unable or unwilling to exercise their option, you can begin the process anew, possibly collecting more option money and increasing the purchase price and rent if the market allows.
I have also read that this option money, plus the option money that you collect each month through the monthly payments all go towards the down payment of the home. Does this mean that I need to refund this money to the buyer and the end of the option so that they can pay the bank the down payment?
You collect option money at the beginning of the deal, not on a monthly basis. And, no, you do not have to give it back to the t/b for any reason. Option money is always nonrefundable.
It may or may not be applicable towards the t/b's down payment. That depends upon what their lender decides. It may be a credit towards the purchase price instead.
As I read your post I think you are confusing option money and rent credits. Rent credits are a percentage of the rent that are a credt towards the purchase price. They are rarely part of the buyers down payment.
Lease Options can be problematic if you do not know what you’re doing. I’ve been burned on a lease option deal with the tenant/buyer taking me to cleaners because he knew more about the tenant/landlord court/law than I did.
Separate you lease from your option contract. Draw up a straight lease agreement with security deposit + 1st and last months payment. Make sure your lease does not refer to anything about the option agreement.
The Option contract, the option consideration is non refundable. Depending on your agreement it can be deducted off the purchase price or not. Its between you and your buyer.
Forget rental credits and just price it right so its affordable to your renter. If you over price your rent, expect default/non-payment.
If you’re doing lease option, you must be willing to truly sell the house down the road and not because you just want to keep charging option considerations.
You have to be prepared in case you have to evict and have to appear in front of the judge and explain your deal. If you’re deal is too convoluted, the judge will side with the tenant. Because at the end of the day on a lease option, you are the LANDLORD.
I agree with what everyone has said. Make sure you have a separate lease and option agreement. I use rent credits and use them to cover the tenant-buyer’s closing costs at the end - just like normal seller concessions. I typically do 30%-50% of the monthly rent. You don’t need to mark the rent up. It’s just a credit on paper at closing. Banks usually allow 3% - 6%.
I have had several evictions and NEVER had a problem with getting them out or giving them back any of the option consideration.
One important point… I give my TB’s a right to extend their option agreement another 12 months if they can’t get a mortgage at the end of the original term. The rent will increase 3%, the price will increase 3%, and they will be required to put down a small additional option consideration. I think this is fair and avoids some pitfalls later down the road. I am not going to kick them out on the street if they can’t get a mortgage yet.