option fee

If you have an option fee on a lease with option to buy, and have a tennant buyer who does not actually purchase the property at the end of the term can you:

A) Kick them out of the property and look for a better tennant buyers
B) Renew the option fee with the same tennant
C) Adjust the contract to rent only rather then rent to buy with the same tennant
D) All of the above

If choice B what’s the best way to formulate your option fee price when renewing the contract?

All of the above.

Hopefully you have a lease agreement and a separate option contract. If so, then you have two separate “contract” issues to deal with.

Your landlord tenant law governs what you can do with your lease agreement. You can choose to renew the lease for another term at the same or higher rent, or, you can choose not to renew the lease once it expires. Landlord tenant law will dictate the notification period you must give your tenant both for a non-renewal and for a rent increase.

I would not “extend” the option agreement once your current agreement expires. Instead, I would offer the tenant/buyer a new option agreement for another option term. You can raise the pruchase price or keep it the same. If the option term is two years, I would raise the purchase price. You can choose to keep the option fee the same or charge slightly more. If your option fee was 3% of the purchase price, then raising the price automatically raises the option fee.

The option consideration you received for the first option term is forfeited once the option has expired. Any rent credits that the option agreement offered are also lost when the option term expires. You can choose to allow accrued rent credits to carry over to the new option agreement, or not.

You can choose to extend the original agreement for another option term and collect another option fee, but my preference would be to write a new option agreement with a new contract price if your market conditions will support it.

If the property is generating a positive cash flow now, I would make every effort to continue working with your current tenant/buyer. Even if your tenant just want to go on a straight lease without the option to purchase, I would do that to avoid a vacancy in a soft rental market.

Just how I see it.

So if my option fee was say, $4,000 and the term ends do I have the power to renew the option fee again with the same tennant buyer for the same fee of $4,000? Not that many tennant buyers would agree to that, but do investors ever try this?

Yes, you could ask for another $4K in option fee to sign a NEW option agreement. But, as you said, more than likely, your T/B’s will walk instead. No need to worry about kicking them out. And that would be a bad thing if they have been good, on-time paying tenants. Better to work out a new lease/option (even if you do get a SMALL option fee) and rent schedule than to lose a good tenant.