NEED QUICK OPINIONS - Lease Option: how much $$ to principle?

11 Replies

So super important question for you BP! I am thinking to Lease Option my primary residence when i move out of state - how much would you suggest i charge in excess to market rate to go towards the Lease Option purchase price?

for example:

market rate today: $215,000

Market Rent: $1550

My thoughts are to do a 3 year lease option for a final price of $215,000. i would charge an initial option fee of one months rent $1550, rent of $1550, and a per month to principle of $250. 

my thoughts are that though they would be paying $1800 per month for a rent normally $1550, after the 3 years they would have the $1550 + $9000 (36 months * $250) for a total of $10,550, or just about 5% down towards the purchase. my thoughts are that way even if they are poor at saving, they at least will have enough down for a conventional or FHA loan, not including the fact that the value of the home will likely be greater than today.

is this unreasonable to ask? is $250 too much? am I being too greedy or am I focusing too much on making sure they will be that much closer to qualifying that i would be making it unbearable?

please let me know your thoughts.

Personally, I would charge an option fee of at least 3% which in your case would be around 6000 or so. It may be better to charge closer to 5% which would be  10,000. In this sense you would get a more motivated and serious tenant buyer. Remember in a lease option. You want a serious individual who wants to own a home but can’t due to issues such as bad credit. Charging an option fee that is too low may attract people who have a tenant mindset instead of a homeowner mindset. 

This discussion will probably go pretty deep so I will quickly tell you what I generally do.

I ask 3% option consideration. That gives them the exclusive right to buy. It is non refundable and does not reduce the PP.

I do not offer purchase credits.  It can be seen as a disguised sale if you do. I offer closing cost help. It starts out at say, 2%, then reduces every year it takes them to exercise and buy.  The price usually escalates as well.

Others can chime in about using separate lease and option agreememts and all that.  A ton has been written on this subject already.

Originally posted by @Jacob Chapman

so steve, if i understand you correctly you are saying that the purchased price escalates year after year with your options? if so, how does that conversation go, since most lease options are set for current market rate..

Purchase Price:    $215,000 until Sept 30, 2019;  $217,150 Between Oct 1 and Sept 30, 2020 ; $220,000 Between Oct 1, 2020 and expiration.

  Something like that. Gets them off their can.

Option fee is too low. The vast majority of lease-option deals fall through. Why? Because the buyer is not financially stable which is why they can't go to a bank in the first place.

You have to take a large chunk up front and it should be non-refundable if they fail to exercise their option. I recommend 5% or higher. Think about the worst-case scenario where they trash the place, miss a few payments, and steal the fridge and washer/dryer on the way out the door. Will $1,550 cover the damages, lost rent, and the time/trouble spent on the deal? Not even close.

@Steve Vaughan Did I read that right? You don't offer rent credits or option consideration over time, and you don't apply the upfront option consideration to the purchase price. And you only offer a maximum of 2% closing cost help? Literally the only thing they're getting for their money is the exclusive right to buy and the price isn't even fixed?

Damn that's hardcore, Steve!

Originally posted by @Doug Pretorius :

@Steve Vaughan Did I read that right? You don't offer rent credits or option consideration over time, and you don't apply the upfront option consideration to the purchase price. And you only offer a maximum of 2% closing cost help? Literally the only thing they're getting for their money is the exclusive right to buy and the price isn't even fixed?

Damn that's hardcore, Steve!

 It would be hardcore if I asked full retail.  I'm generous with valuations. If they actually exercise, my TBs are better off than most. To me it's just another rental I grew tired of.

Originally posted by @Steve Vaughan :
Originally posted by @Doug Pretorius:

@Steve Vaughan Did I read that right? You don't offer rent credits or option consideration over time, and you don't apply the upfront option consideration to the purchase price. And you only offer a maximum of 2% closing cost help? Literally the only thing they're getting for their money is the exclusive right to buy and the price isn't even fixed?

Damn that's hardcore, Steve!

 It would be hardcore if I asked full retail.  I'm generous with valuations. If they actually exercise, my TBs are better off than most. To me it's just another rental I grew tired of.

Good advice Steve. I'm doing some research on LO's to sell a flip I just did. I like your idea of increasing sales price each year to get them to exercise early. I want them to purchase the house, not looking to collect option fees. What do you think about putting in similar increases in rent as even extra motivation to exercise early?

Originally posted by @Lee S. :
Originally posted by @Steve Vaughan:
Originally posted by @Doug Pretorius:

@Steve Vaughan Did I read that right? You don't offer rent credits or option consideration over time, and you don't apply the upfront option consideration to the purchase price. And you only offer a maximum of 2% closing cost help? Literally the only thing they're getting for their money is the exclusive right to buy and the price isn't even fixed?

Damn that's hardcore, Steve!

 It would be hardcore if I asked full retail.  I'm generous with valuations. If they actually exercise, my TBs are better off than most. To me it's just another rental I grew tired of.

Good advice Steve. I'm doing some research on LO's to sell a flip I just did. I like your idea of increasing sales price each year to get them to exercise early. I want them to purchase the house, not looking to collect option fees. What do you think about putting in similar increases in rent as even extra motivation to exercise early?

 I would think an annual rent escalation clause in the lease would be motivation, too.  Keep the lease and option separate of course.

Originally posted by @Steve Vaughan :
Originally posted by @Lee S.:
Originally posted by @Steve Vaughan:
Originally posted by @Doug Pretorius:

@Steve Vaughan Did I read that right? You don't offer rent credits or option consideration over time, and you don't apply the upfront option consideration to the purchase price. And you only offer a maximum of 2% closing cost help? Literally the only thing they're getting for their money is the exclusive right to buy and the price isn't even fixed?

Damn that's hardcore, Steve!

 It would be hardcore if I asked full retail.  I'm generous with valuations. If they actually exercise, my TBs are better off than most. To me it's just another rental I grew tired of.

Good advice Steve. I'm doing some research on LO's to sell a flip I just did. I like your idea of increasing sales price each year to get them to exercise early. I want them to purchase the house, not looking to collect option fees. What do you think about putting in similar increases in rent as even extra motivation to exercise early?

 I would think an annual rent escalation clause in the lease would be motivation, too.  Keep the lease and option separate of course.

Thanks.  I should have said “more aggressive rent increases” for motivation.  I think I know how I’ll structure the lease and option now, separately of course.

Hi @Jabob,

We don't do any credit.  It requires a down payment to get in any of our homes.  Then they are just paying a lease payment until they are able to qualify for a mortgage.  Otherwise, what would be their motivation to get their own loan?  That's the way that we do it and we have buyers cash out and get their own loans on lease purchase deals.

Hope that helps,

Chris Pre