# Lease with Option to Purchase help

Hi Everyone,
First post for me, go easy k?

I own a property that I’d like to lease out with an option to purchase. I’ve been doing the math with a spreadsheet, and while it looks good to me, I wanted to check with you all. While I’m not going to post the spreadsheet, I would like to know if any of you use any formulas for lease options?

For instance, what’s a normal percentage of the monthly payment that goes towards the principal? Say they pay \$1000/month. Would \$100 of that towards the principal be reasonable? What about \$2000/month?

Also, I understand that for anything under \$250000 the consideration is typically \$3000 or less. Is that reasonable?

Also, the price of purchase at the end of the lease. I know that is determined by calculating the appreciation . . . but how do you determine the price now? Do you just think up an asking price, or appraisal, or the going market prices?

I think that’s it. Thank you!

-S

For instance, what’s a normal percentage of the monthly payment that goes towards the principal? Say they pay \$1000/month. Would \$100 of that towards the principal be reasonable? What about \$2000/month?

In a lease option arrangement, your tenant/buyer pays you rent until the opion to purchase is exercised. All of the monthly payment you receive each month is RENT. None of it goes toward principal.

Now, if you are asking about a rent credit where a portion of each month’s rent is rebated to the buyer in the form of a price reduction, then that is a different question. Technically, you can offer whatever amount you want.

If the market rent for your property is \$1000 per month, then experienced investors don’t give any rent credit if the tenant buyer is paying just \$1000 per month. Experienced investors may offer a portion of the rent collected that is over and above the fair market rent for your property as a rent credit, but only if a rent credit is needed to sweeten the deal for your tenant buyer.

Many experienced investors will also offset the amount of rent credit given by an increase in the option price. For example, let’s say an investor owns a property that will sell for \$150K on an option to purchase. If the investor is giving a \$200 rent credit each month on a two year option, then the option price might be increased to \$155K to cover the rent credit given.

If lease options are popular in your area and rent credits are common, then you will probably have to give rent credits also.

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Also, I understand that for anything under \$250000 the consideration is typically \$3000 or less. Is that reasonable?

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I think any amount up to 3% of the purchase price is reasonable. More than that, then the typical buyer has enough down payment to get his own mortgage and just purchase outright.

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Also, the price of purchase at the end of the lease. I know that is determined by calculating the appreciation . . . but how do you determine the price now? Do you just think up an asking price, or appraisal, or the going market prices?

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This is a tough one. Five years ago, we would have just said use today’s fair market value and then use a 5% annual escalation factor to set your option price. Five years ago we were seeing better than 5% appreciation in most markets. That is not the case today.

Many markets have seen a decline in values in the past two years, and the prices may still be falling. Figuring out an asking price in today’s market is difficult enough without trying to predict where prices might be a couple years in the future.

The best you can do today is see what is happening to the comparable properties in your neighborhood. If prices are stable, but not increasing, then you may have to set your price at or just slightly higher than today’s fair market value. Whatever you do, set the price at a point that makes sense for your circumstances. If you are desparate to sell, then you can’t be too greedy.

Dave T, thank you SO much for that explanation. That was exactly the detailed answer I was looking for, and it gave me a much clearer idea of how to proceed.

Thank you again,
Mark