Lease option/rent to own?

11 Replies

I’m trying to sell my home for 145k I had someone approach me about rent to own..... I owe 100k on the house.

Is there a way to make this profitable?

How much money can I ask for down?

How do you structure that deal?

There are several things to consider when doing a rent to own or lease option, especially on your personal residence.

1. The biggest drawback is the potential for losing your ability to take any profits tax-free.  If you lived in the home for 2 of the last 5 years you can take up to 250k or 500k as a married couple tax-free on the sale of your personal residence, keep this in mind going into any lease option for longer-term periods.

2. We use a lease with a separate option agreement.  Make sure the potential buyer is capable of making the payments and be very careful of doing a lease option to another investor (you lose control over who is actually living in your home).

3. You can likely get above market rent for a lease option, you can very likely get an option price well above the current value as well, the tendency is higher for a longer term option.

4. Get a sizeable option fee (make sure the option states it's non-refundable option fee or the like) that you can keep regardless of whether the option is exercised.  This can range from several thousand to a lot higher, depending on what you negotiate. 

Ultimately, you need to make a financial decision on if this is the best thing for you.  Clearly there is some risk here as there is the potential of getting the home back, and in far worse condition that you leased it. You could also make great monthly cash flow and get a great payday at the end if they exercise.

@Greg Gerken   Rent to own is great if you get a qualifed buyer.

Make sure to do a lease option contract so that the property remains in your name.  This saves you the foreclosure headache if something goes wrong down the road

Asking whatever you can for a non-refundable option fee (5-20%) that is applied towards the asking price, but is forfeited if the agreement goes south.

Have a lawyer draft a lease option contract and learn it.  Educate your new tenant thoroughly. You want them to succeed here.

 I usually do

Purchase price: X

Interest Rate: 6-9%

Payment : 15 year amortization with taxes and interest included

Balloon payment in 10 years

Updated over 2 years ago

Please disregard this post. I've combined two strategies to create one illegal mess.

Originally posted by @Michael Ablan :

@Greg Gerken   Rent to own is great if you get a qualifed buyer.

Make sure to do a lease option contract so that the property remains in your name.  This saves you the foreclosure headache if something goes wrong down the road

Asking whatever you can for a non-refundable option fee (5-20%) that is applied towards the asking price, but is forfeited if the agreement goes south.

Have a lawyer draft a lease option contract and learn it.  Educate your new tenant thoroughly. You want them to succeed here.

 I usually do

Purchase price: X

Interest Rate: 6-9%

Payment : 15 year amortization with taxes and interest included

Balloon payment in 10 years

 What are you referring to here?  It appears you are talking about a Land Contract, not a LO.  Here's why:

1 - Title remains in owner's name until Option is exercised in a LO.  There is nothing to foreclose.  The only payments are on the lease (monthly), and the option consideration (1 time).

2 - Option fee (consideration) is always non-refundable, but should never be applied to the purchase.  The OCF is 100% the cost of the Option.  It isn't the down payment.  If it is used like a DP, you no long have an Option agreement...you have a Land Contract...and a giant can of worms.  There is not agreement that can go south...unless this was a Land Contract, an not an option. 

3 - There is not Interest rate, amortization, or balloon payment in a Lease Option.  They are parts of a Land Contract though.

Originally posted by @Michael Ablan :

@Joe Villeneuve  This is very interesting.  I need to consult with my attorney and see if I've created some issues for myself.  Thanks for pointing this out

 A Lease Option is 2 separate contracts...the lease, and the option.

The Lease allows the tenant to live in the property.

The option gives the buyer control over the property for the length of the option agreement.

Notice I referred to the people involved as a "tenant" and a "buyer".  They are two different people, even if the have the same exact name.

The Option Fee (Consideration) is 100% of what the Option Agreement costs.  It isn't a contract to buy the property...it is nothing more than the first right of refusal to buy the property over the time period stated in the Option Agreement.  Thus, it is also NOT a down Payment, and it is NOT refundable since the Buyer gets what they are paying for.

When the Buyer "exercises" the Option Agreement, they are then buying the property, and use the same process as if they were simply buying it from the start.

Credits for rent and/or Option Fee should never be given (this is old school).  A really bad lawyer can turn this agreement into a Land Contract, and get all the rent and the Option Fee credited towards the purchase.

THis is also why you never refer to the "other" contract in either contract.  Keep them completely separate, written and verbal.

@Greg Gerken

Sell at Purchase Price on $159,900 and the buyer locks that in over the course of their deal.  As market continues to appreciate, that price remains the same.

Absolutely, rent it for more than your current mortgage payment

We usually do 3%-10% of the Purchase Price

Hope that helps,

Chris Pre