Structuring a Lease/Option

6 Replies

I have a property valued at $330K to 340K that I rehabbed. If I do a lease/option, how would I structure this? Other comp houses in the area are leasing for $1,500 to $1,700, but when structuring a lease option, do I make the payment include principle (less down), interest, property taxes and insurance like a normal carryback? Also, is it unreasonable to charge 7% to 8% in the market?

It would also be helpful if anyone could recommend any lenders that may work arround the "Flip Rules" where I have to hold a property for 6 months they will fund a loan just based on the purchase price and not the appraised value.

Ed,  I have never drafted a lease purchase agreement, but they are extremely complex and subject to local law which may control the answers to some of your questions.

I would strongly recommend finding a real estate attorney that has experience in your area.  If there is a local investors group, get some referrals.  Then interview some attorneys and get them to commit to a flat fee.  Don't allow them to sell you on an hourly rate. 

Also, a larger than normal deposit and higher than normal interest rate will be more than warranted.  The only reason to buy "lease to own" is because you cannot get traditional financing.  If the lender (in this case you) is taking a bigger risk on the purchaser, the lender is entitled to a high interest rate.  7-8% actually sounds cheap to me.

Good luck!

Thank you for the advise Brian.

I agree with Brian. It a good advice. It's legal document and work spending few hundred dollars on it.

Hi @Ed Caldwell  

There has been alot of changes for owners offering seller financing.

Dodd Frank, Safe Act, etc.

Here is a lawyer's article on different types of seller financing.

Here is a strategy:

Get an appraisal from a licensed appraiser.

Get a rental appraisal from a property manger.

Avoid having the lease option re characterized as an installment sale from the IRS 


Use 3% as a down payment (option fee)

Use a RMLO (Reg Mortgage Loan Originator) to give you a safe harbor in case the tenant buyer gets an attorney and wants his option money back or wants you to prove that you abided by the CFPB's Ability to Repay Rule.

Use this AZ attorney

Best of Luck.

@Brian Gibbons

That is great advice!  General considerations and a good referral.

I would just put 2 agreements in place

1. A Lease agreement (based on your price the payment would easily be $1900 to $2000. Keep in mind that these rates also include credit that the buyer will eventually get back. So the monthly payments can be above market value as long as it's describe properly. That being said, all this is subject to local rental laws.

2. An agreement of purchase and sale with  closing date of 3 to 5 years ... whatever he date is. This agreement shows the initial non refundable down payment as well as any monthly credits if one ar being included. Also, the final sale will be whatb the buyer will be buying it for at the end of the agreement.

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