Can Lease option price be same as appraisal instead of fixed?

Question

I have a buyer thats willing to buy my fixer upper house as lease option. He wants to fix only the essentials to qualify for a bank loan. He is asking if we could put the sale price as what ever it will appraise for when he is ready for loan. Is this possible? I always heard that we need to agree on a fixed price first. How can I make this deal with him? Thank you in advance for your feedback.

Brad S. · Answer

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I have only done 1 lease option deal, but I had studied them extensively years ago and I don't agree with that assessment. The benefit of the T/B (tenant/buyer) is they will typically feel like more of an owner than a tenant. And they therefore, treat the house as an owner, keeping it in good condition, improving it, adding value, etc. While I am sure there are some that don't turn out well, if you do it correctly you can mitigate those issues.

First, is to do 2 separate agreements. You do a typical lease with typical terms and then you do a fully separate option agreement. You don't want it tied together, you want them to stand separately. Then if you have a tenant dispute, they are just a tenant, otherwise, a judge may look at them as an equity holder. But, as always, you need to be clear on the laws in the areas you work.

There are multiple benefits to lease-option deals.

Typical Lease-Option* You get an up-front non-refundable "option consideration," for the right of the "buyer" to purchase the house at some point in the future* You can typically get higher than market rent* As previously stated, typically the tenant/buyer treats the home better, since they feel they have some ownership interest* You benefit from any potential appreciation and/or can command a premium for the house with no marketing or downtime.* There are benefits to the tenant/buyer also. Typically, they may not be able to qualify to purchase a home at the moment, but they may be able to get their affairs in order (i.e. raise their credit, save for a down payment, do what is needed to qualify for a loan, etc), while having the goal of buying the house they live in.

My 1 "accidental" lease option deal cost me zero $ to purchase, made me hundreds monthly for years, until the T/B decided they couldn't complete the deal and voluntarily left the house in good condition for me to re-rent it, until I finally sold it conventionally for a nice profit, which I exchanged into a growing market, which doubled my equity in 1 year, and increased my cashflow. If I was able get a handful more deals like that, I'd be set! But, this was a happy accident! "Luck is when preparation meets opportunity."

Brad S. · Answer

Yes, that is possible. But, usually, you would get an appraisal directly for you and/or the buyer separate from the lender appraisal. Sometimes 2 appraisals would be obtained and averaged (1 from buyer and 1 from seller). But, I wouldn't leave this up to the lender's appraisal. So, yes, you (and/or buyer) would need to contract the appraiser directly and pay them, separate from a lending appraisal. One reason for this, is each appraisal is done for a specific purpose for a specific client/s and you want the purpose to be "to determine the contract price," and the client/s to be seller/buyer.

But, a lease/option is not a sale, it is a lease with an option to buy/sell in the future, at some agreed upon terms. So, I assume you are saying can you do the option part of the agreement to state the sale price to be determined by an independent appraiser.  Typically, yes, you can, but I suppose it might differ in different states and you may want to consult with a real estate attorney specific to your state to make sure that agreement is legally binding, etc.

But, I'm confused as to what deal you are trying to do?  Are you saying that the tenant/buyer will fix the house right now, in order for the house to qualify for a loan now? Or, that he will fix the house right now, to live in it, so the house will qualify for a loan at a later date (option date)?

Zach Wain · Answer

@Uday Kumar - Here is the tough part...  The appraiser will require a copy of the sales contract in order to move forward with the appraisal, so you need to list your agreed upon sales price for an appraisal (that can be used for lending purposes).  There is no way around this one, you gotta settle on a price first and hope the appraiser does a good job and gives you their honest opinion of value, and does not magically settle right on the sales price you selected...

Uday Kumar · Answer

@Zach Wain Thank you.

@Brad Sand Yes the buyer will live in it and fix it to get a bank loan.

Here is what I gathered from an expert. Lease option can be a bad deal if anything changes in the tenants life and they will try to take it out on you. Such as calling code enforcement to show defects, blackmailing to get the down payment back, etc. Unfortunately this is not going to work. Thank you guys.

Can Lease option price be same as appraisal instead of fixed?

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