Lease Options...What should I offer?

I am an investor in Pittsburgh. I’m writing a lease option contract on a free and clear property. There isn’t a mortgage so the seller’s expenses are taxes and insurance. That total is approx. $150. Area rents are $650. Should I initially offer a lease payment that is just enough to cover the taxes and insurance. What is reasonable for me to offer as an initial monthly lease payment? I want to make a profit, of course. :biggrin

Market rent is market rent and has nothing to do with what the owner’s expenses are. Having no mortgage on the property simply means the cash flow should be better for this owner. Depending upon the supply/demand in your market and the owners desire to sell the property you must make your offer (monthly rent, rent credit if any, up front option fee, option price) attractive to close the deal.

Thank you for your help. What is a reasonable amount of monthly profit I should expect to make? $100.00, $200.00? What is the minimum monthly cash flow you would find acceptable as an investor? Also, I’ve read about investors offering $100.00 for option consideration. Is that reasonable? Will anyone take that serious. :help

Get the best you can get. There’s no rule of thumb unless you want to make one up yourself. How about this one… Price / 200 + tx & ins.

So if you’re buying for $50k then that would be $250 + $150 = $400/month and you rent it out for $650. Sounds good to me.

To answer your question about consideration. I never pay more than $1.00 deposit. Depending on how you approach it most sellers don’t expect to get anything. Then you say: “Oh by the way I have to give you this token dollar to make this contract binding.”

When I do my l/o’s I always charge purchase price amortized over 30yrs @ 10%. So a 100k house would be about $880/ mo. Like Doug said though, there really is no right or wrong way to figure it out as long as your cash flowing.

I assume you’re talking about what you charge a t/b.

He speaks the truth. I would make the payment amount roughly the same as if the tenant where to be making mortgage payments on the home. This is especially good if you expect the tenant to exercise their option at the end of the contract.

Totally agree! I live in one of those places where rent can’t possibly cover PITI without a huge down payment. So I figured out pretty quickly that if I wanted to do L/Os I couldn’t follow the standard guru advice to base my T/Bs payments on the going rent rates. Besides, how fair is it to put someone into a house with a $1,000/month rent when you know if they buy next year they’re going to have to cough up $1,500/month?

Better to get them used to the real costs of home ownership right from the start. I usually charge a little more (I’ve gone as high as 9% but usually around 7.5-8) than what I expect they will be able to qualify for down the road so that when they do buy they’ll be in for a pleasant surprise. It doesn’t hurt as encouragement to close either.

If I want to keep the cash flow rolling in for as long as possible then I’ll lower the payments a bit, but still keep it competitive with going mortgage rates.