Seeking advice on a rent to own deal

Seeking advice on a rent to own deal

Detroit · Member since 2015 · 22 posts · 5 votes

This is the perfect place for advice so here goes:

I am relocating for work very soon, 3 weeks. I do not have time for the back and forth of listing my house and trying to sell it. I have only been in the house for 15 months so I have very little equity. It is a very unique property. It is almost 4 acres with a 3100 sqft house, 1200 sqft garage and 1500 sqft workshop. I bought the property last year in order to expand my side business. I overlooked a lot of little things because I only wanted the property for the land and workshop not necessarily the house. I paid 440k. A realtor I spoke to suggested listing at 475 and being prepared to accept 465 based on comps. If that's the case, the fees will eat up some of the money I put down originally. I also put 10k into the work shop for improvements. I am not afraid to rent out the property. I'm asking $2600 to include water and a pool cleaning service. I am trying to get the most money down in a lease option so I can buy another house where I am moving too. 

What is a fair price on a 5 year rent to own? I was thinking a 4% increase in price every year to account for appreciation. Year 1: 483,600 Year 2: 502,944 Year 3: 523.061 Year 4: 543,983 Year 5: 565,742. I'd give the tenant the option to buy every 12 months at those prices based off 4% increase on original price of $465,000. I would give a rent credit toward the purchase price of $1,000 per month. 

With 5k down and a $1,000 rent credit each month toward the purchase price, the tenant would end up having to get a mortgage for $466,600 after year 1, $473,944 year 2, $482,061 year 3, $490,983 year 4 and $500,742 year 5. 

Do these numbers make sense, am I asking to little, too much? Not enough rent toward sales price, too much? 

Thanks for any and all insight!!!

 

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Rental Property Investor · Greenwich, CT · Member since 2015 · 4k+ posts · 2k+ votes
6y

@Ben Chapman, you might lose a little money. Sell, cut your loses and move on. You're creating this whole complicated thing to try and avoid losing a few grand. There are so many places where your plan can go wrong and you'll end up even more in the hole.

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  • Rental Property Investor · Greenwich, CT · Member since 2015 · 4k+ posts · 2k+ votes
    6y

    @Ben Chapman, you might lose a little money. Sell, cut your loses and move on. You're creating this whole complicated thing to try and avoid losing a few grand. There are so many places where your plan can go wrong and you'll end up even more in the hole.

  • Detroit · Member since 2015 · 22 posts · 5 votes
    6y

    Couldn't it work flawlessly? I sell it in 5 years and the tenant gets a great house that they don't qualify for mortgage wise today. I just want to make sure my numbers aren't way off base.  

  • Jonathan GreeneBusiness Member
    Real Estate Consultant · Madison, NJ · Member since 2016 · 6k+ posts · 7k+ votes
    6y

    Everything about what you wrote was off base, especially the part where you think it might work flawlessly. @Jaysen Medhurst is right, sell it and don't look back. You are trying to get a diamond out of coal. Lease to own is very unpopular and would more than likely get you thinking you were going to sell it and it would never happen. If someone wants to buy this property now you should sell it and run, it sounds like a lot to take on, but also could be a perfect fit for someone who wants to run a business out of the workshop at home. You are taking a Sell X to get Y equation and turning it into X*2-Y+Z (depreciation over time) + hope +ABC = 5 years later cash out, rich.

  • Member since 2020 · 34 posts · 27 votes
    6y
    What if tenant causes damage to property, gets hurt as it is not all updated & sues you or loses job and goes in default? Will have bandwidth to followup and pursue legal action. All this while not even accounting for regular landlord tasks like maintenance etc.
    If someone is not able to qualify for loan today, things are not that better in future consider impact from covid19.
    I personally would look into cutting off loses and move on. If you do end up with any gains, look into 1031 exchange.
  • Investor · SC NC, VA · Member since 2020 · 1k+ posts · 756 votes
    6y

    Yep, cut your losses and concentrate on what is important over the next five besides the fact you didnt want to get screwed in this deal.

  • Detroit · Member since 2015 · 22 posts · 5 votes
    6y

    I'm kind of surprised by some of the responses. Isn't Bigger Pockets all about the BRRRR strategy and house hacking? Although I didn't have to do much hacking, I bought a great property with very little down in relation to what it cost. I will now be able to rent it for more than my mortgage, and not have any of the responsibility of a landlord, as it's a lease option, and the tenant is going to be responsible for maintenance. They are paying 1.5% down for the option to buy the property in the future. If they do buy it, good for me! If they don't, I can rent/lease option/sell it again in the future. I'm not to concerned with the state of them defaulting because I can afford the mortgage without them.

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