Lease Option For Low Price Point Houses

[Lesley Resnick]

I am considering offering tenants a lease option to purchase the house they are renting.  I don't actually care if they purchase the house.  I will price it at market plus a small percentage to reflect the value in 3 years.  I am looking for the tenant to have skin in the game and hopefully not be evicted nor trash the place, in fear of losing "their" house.

The model I am considering is a standard lease and a low cost, non refundable fee to purchase the option.  I am thinking a 3 year term with an additional monthly lease option payment.  They would receive a buyers credit towards their down payment.  I need to do some research to determine how to legally structure this in Florida.     

[Ken M.]

Quote from @Lesley Resnick:

Quote from @Ken M.:

Quote from @Lesley Resnick:

Update…I have gotten 2 inquiries and I asked them to figure out what they could come up with for a down payment on the option.  They both seemed excited about the idea.  No one has responded yet with an amount they can pay. 

I don't need much for the option, since they are still tenants and I will price the house at market.  No vacancy during the sale, I will handle both sides of the transaction.  There are a number of city programs that I can direct them towards.

I do a lot of Lease Options. My market is in the $400,000 to $500,000 range. I require 10% down, though I'll take 5% if their position is strong. My buddy across town charges much less and has a high "churn rate" which I equate to setting someone up for failure. You don't want to do that, in my opinion. You have to be careful to follow Dodd-Frank to keep it legal.

I am not that familiar with Dodd-Frank, so I looked it up on GOOGLE.  I am not sure how an option to buy a property is in violation?  To big to fail and systemic risk, seems to be a key elements of the legislation.     

Could you detail how you structure one of your deals?  

They give you 10% down, what do they get in return? Is there a credit back to them or just the right to purchase the property in the future?  How does this effect their qualifying for a mortgage? 

Is there a monthly fee on the option?

Dodd-Frank is as thick as a book. You can not rely on google to give you the salient points. It's updated from time to time. In essence, it says that if you act like a bank, you are to follow banking regulations. You have to do "underwriting" to determine that they can actually qualify. But, it's more specific than that. I said "You have to be careful to follow Dodd-Frank to keep it legal" I did not say that lease options were illegal. 

When I sell, the 10% down or option fee, goes toward the principal. 

The essence is that you have to qualify the buyer and be reasonably certain that your buyer can actually afford the property if it is to be a personal residence. At one time, people were doing lease options and other forms of financing, taking large sums of money down, when the buyer could clearly not perform. This ended in the seller foreclosing or in the case of a lease option, losing the right to buy the house and losing their down payment. It was a way of relieving a buyer of their down payment when the buyer clearly had no means of success. It's called "churning". A sophisticated, but financially unqualified buyer can sue and you wind in court fighting the issue for a long time.

Since this confuses you, I would have a mortgage broker involved. They are licensed for this type of transaction.

To see if your transaction falls under Dodd-Frank, look up "dodd-frank and private lenders"