Lease Option Personal Residence

8 Replies

Hello everyone, I've lived in my current house for 4 years (my first live in flip). I just put it up for rent at market value for $1800 (4br/2ba @ 1640 sqft) in Ohio. I considered selling originally, but chose renting for the monthly checks while house appreciates....now it just hit me I could do a lease option! I paid $146k, UPB $123, and it recently appraised at $191k. I've never done a lease option before, so I'm open to suggestions on how to structure the deal. lmk if any other pertinent info is required. Thanks in advance!

So there are a few things to consider here with doing a lease option, especially in this situation.

1. What is the term of the option you wish to give? A key consideration, in this case, is capital gains. If you've lived in the house for 2 out of the last 5 years you can likely take most of your profits tax-free (you'll probably need to recapture some depreciation but that should be minimal). So you may want to consider a 2-3 year option. If capital gains is not a concern, potentially a longer-term option would work better. The longer the option period, generally speaking, the higher the option price you can get.

2. What is the option price (strike-price) you wish to get for the house?  Think in terms of future value.

3. What duties will the new resident have? (We use a nuisance repair clause in our contracts and the resident is responsible for all repairs under a certain amount - based on our landlord tenant act in AZ, check with your state).

We love doing lease options because we get a much better quality resident (they tend to think like owners, not renters) as well has lower repairs and higher monthlies.

Hi @Curtis Maag and welcome to BiggerPockets!

Yes, a lease/option is definitely worth pursuing. If you market the property as such, and you don't get any traction, then you're no worse off than if you just rented it. But if you do get serious interest, you get all the benefits of a lease/option, including that sweet, sweet non-refundable option consideration (NROC) money!

You are right: Structuring the offer is key to lease/option success. Given what info you've provided, I'd be aiming for $1800 - $1900 in monthly rent, NROC of $5K - $7K, and a 12-month option at a strike price of $199K, with the opportunity to renew the option for additional time as long as progress is being made.

If you do take the LO route, make sure you remember to NOT make the mistakes many do:

1 - Don't mix the lease and the Option.  They are totally separate contracts.

2 - Never give any "credits" towards the purchase from the rent or the Option Consideration.  That is the kiss of death.

3 - Never mention "the other" contract in either contract.  See #1 above.

@Andrew Kiel 1, yes, I've lived in for the last 4 years (still there for now). 2, Idk yet..I suppose I'll take current value and add the city's metrics of neighborhood appreciation to get a fair future value for strike price. 3, that's a great idea, which I'll add to contract. Your reasons for lease option line up with mine for why I was thinking this route. Thank you!!

@Mitch Messer Thank you! I ran those numbers and they work for me. Now, let's say the 12mo (2yr, 3yr etc) lease runs out, and they want another term to get in a better financial position...is it expected that they put down another NROC to hold it, or is NROC a one time deal? And does any NROC or rent act as a credit towards the strike price? Along those lines, can the strike price be adjusted at a lease re-signing if occupants need more time? Is the security deposit separate or included in NROC? I very much appreciate your time and thoughts on this matter.

Is there a book or website specific to lease options anyone would recommend for me to read? 

Originally posted by @Curtis Maag :

@Joe Villeneuve Hey Joe!  Seems you answered many of the questions I had as I writing my previous response haha.  You're a mind reader!! haha  Thank you 

 No...just experienced, and familiar with the most common questions and mistakes many investors make when they attempt to use the lease option, or Sandwich LO strategies.

@Curtis Maag Yes, once the option agreement term expires, you're free to adjust the strike price as you see fit, as long as the tenant/buyer is prepared to sign said agreement. Also, we don't typically ask for more NROC at that time, but I know that some do.

Also, we don't collect both NROC and a security deposit. There's no real need: You've already got a big chunk of their money that they're never getting back (directly). Why confuse things with a security deposit?