Lease to purchase or flip it?

Am currently looking at a house that has been appraised for 77k. This motivated seller is willing to sell it for 64K plus he will pay all the closing costs. This mortgage (P & I, + taxes + hazard ins) is about $565/month. I have someone willing to rent it for $750/month and later purchase it. How do i determine how much down they should pay? Say we enter a five year contract, how do i determine what they should pay for the house to own it? Please feel free to include any information that i might need to make this deal work. The other idea is to buy and flip it. Thank in advance.


Wow congratulations. Sounds like a potentially great deal. Personally I would like to have more meat on the bone but that’s just me. If you already have a tenant-buyer then that would be better since you will have positive cashflow, an asset and tax benefits on this property. If you flip it you will have to pay normal income tax on this property which could be in excess of 28%. Buy and Hold is what we all try to get to eventually since you don’t have to work for the income, Passive Income. Make sure you contract states that the tenant-buyer does NOT have any equitable interest regardless of any maintenance, improvements, and/or repairs done UNLESS they excersize their option to purchase. For a home in this price range I would say $2k thru $7k would be fair for the NON-REFUNDABLE option consideration to lock in a price now which would be applied to their purchase price.

Thanks for the advice. How do i determine the selling price for the house after the five year contract is over? Do i have it appraised again and negotiate a price with the buyers or do i set a purchase right from the start?

If you record the Lease Option - which you absolutely should - then that is considered…a sale transaction.

all correct me if i’m wrong, but that violates DOSC -

you’re lender can call the loan due.

i do not care what anyone on here or anywhere else says - unless you have permission from your lender to engage in such activities - i wouldn’t do it.

just rent it - do like a triple net lease of somekind where the tenant cares for the property and you give them a reduction in rent as long as they care for it and pay on time.

its probably best to set the purchase price at the time the lease is signed. unless you expect the value of the property to increase substancially over the next five years. why not have a two or three year lease with option and set the price at 80k?

tmcg is correct. A lease can only be exempt from the DOSC under US Code Title 12, § 1701j–3. Preemption of due-on-sale prohibitions the granting of a leasehold interest of three years or less NOT containing an option to purchase; In other words, ALL lease options violate the DOSC.

Setting a sale price at the time of the lease will very likely qualify the transaction as a “disguised sale”.

Da Wiz

Well that’s why you have a Lease Agreement and a completely Seperate Option Agreement where the sale price is locked in. Your customer will pay a hefty “Option Consideration” fee to keep that option valid for a specified amount of time which would be non-refundable, have a set price, and have an expiration date, which should be renewable with another options consideration fee.

This should keep you out of hotwater. So in the eyes of the lender you only have a lease agreement. The option is a seperate agreement between you and your tenant-buyer.

It’s all in the way you structure your contracts.

I know only a bit of the DOSC so I won’t comment on it. But I know that the lender will find out about the loan ONLY if you tell them or they are somehow notified. The loan agreement is structured based on your intent of the loan, whether it be as primary residence, investment property, second home, etc… So if you got a loan for a home as your primary residence then you move into the home then this is legitimate. If you decide to move out and put a renter or tenant-buyer into the home after the fact the that’s your perogative to do so. IF you then decide to tell the lender what you have done then that’s your perogative to do that also. But why would you?

If any of you other investors or loan brokers want to clear that up please feel free.

What the experts say:

Donald J. Valachi, CCIM, a well-respected real estate authority. Here is his summary:

“Although the lease option is a valuable strategy in many situations, it should be used with great care. There is always a threat that the IRS may view the lease-option transaction as a sale and the lease as merely a financing device. Rents that are significantly above fair market rents, when combined with a “bargain” option price, indicate that the transaction is likely to be characterized as a sale and that the rental payments are, in fact, installment payments on the purchase price. Thus, both the rental payments and the option price should be set by the parties with reference to going market values and rents for similar properties. And the parties should be prepared to justify their estimates of rent and purchase price if the transaction is later challenged by the IRS. Rental value and property value are best established through independent appraisal by experts.” Here is the link to the full article:

John Cash Locke: ""A Lease/Option can be considered that the Tenant Buyer has “Equitable Title” in the property and a judicial foreclosure is required to remove the T/B, I have seen it happen so I know this for a fact. Even if you separate the lease from the option once the T/B says he has an option the judge can rule “Equitable Title.”

John T. Reed: John T. Reed, (whom I do not like but who many believe) says: “The gurus are not interested in finding out what the law really is on lease-options. I have long urged them to obtain an IRS private letter ruling on the income-tax legality of their lease-option agreements. The cost of such letter rulings was drastically lowered years ago. But not a single lease-option guru has ever requested such a ruling, in spite of the fact that it would help his clients and help him market his material.”

Scott Moyes (Realtor, Investor, Author):
"As a result of the Lease Option and the ensuing claims of “Equity” (i.e., the tenant held an “equitable interest” in the property as a result of having paid an option fee and being given rent credits) a simple eviction was not in the cards. I would now be relegated to the time and expense of a foreclosure process instead (you can’t evict an owner with “equitable interest”, which foreclosure no doubt had to be followed by an ejectment action in order to retain possession and entry, and then a quiet-title action to remove the legal claims and clouds to the deed in order to allow it to be sold (sigh). After months of no rent for me and free payments for the tenant, the lender finally began foreclosure proceedings. After another 10 months, the property was sold on the courthouse steps.

The tenant buyers sued me for their $10,000 option fee, and all the rent credits I had given them. To add insult to injury, the optionor (owner) didn’t like me anymore and sued me for making him lose his house to foreclosure. I decided right then and there that I was finished with lease options."

Rod (Moderator): There is risk involved in any activity and it does not matter if we are talking about Real Estate investing or not. The key is to simply select activities that will minimize that risk. Personally I have seen the DOSC kicked in on a Lease Option situation. I don’t do lease options just for that reason. As we all know they are cracking down on Lease Options across America and there is a reason for this. What is that reason? The United States Government does not like the fact that you are giving someone a specific time frame to purchase the home and or lose your deposit on that property and personally I do not blame them for that. Is there a creative yet simple way around that? Yes and someday when it is not 1 am I will share that with you if you would like.

Here is the bottom line on this situation If you are doing Lease Options chances are you are also doing Subject 2 I have also seen the DOSC kicked in there as well. So it gets back to the key point here which was select activities that will minimize that risk.

Judge Pierce (former Sen. and author of AZ’s Tenant/Landlord law: Different states have different laws so these are just guidelines and one or more may not be applicable in your own state:

  1. Collection of more than 1.5 times the monthly rent as Option Deposit is illegal in Arizona by statute, and seen by the court as a “possible down payment”. Check your state’s laws.

  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. Think about it. If you agree upon a sale price at the beginning and you agree how that price will be paid, you have a sales contract, no matter how you disguise it.

  4. The Lessee also holding an option on the same property they are leasing regardless if it is one document or two separate documents. (This means no sandwich leases and is becoming more prevalent in this anti-small investor market).

  5. The Lessee being responsible for maintaining the property.

Da Wiz