Lease Option to Lease Option

15 Replies

Hello,

I wanted to know if there is anyone here whho has done a lease option agreement with seller for 6 months and lease option the property to buyer for 3 months? I was running numbers and wanted to know if someone has done this. If so, how successful was it. If not why?

Originally posted by @Raymond Hill :

Hello,

I wanted to know if there is anyone here whho has done a lease option agreement with seller for 6 months and lease option the property to buyer for 3 months? I was running numbers and wanted to know if someone has done this. If so, how successful was it. If not why?

 Sure, lots of people do those, like myself. I never Lease Option for less than 2 or 3 years and when I lease Option out it is always 1 year less than the Option I have. That way I have some breathing room if my optionee can't get financing to exercise his option.

For instance, I get a 3 Year Lease Option and sell on a 2 Year Lease Option.

I think you will run into trouble with 6 months and 3 months. It isn't really enough time to get "seasoning" to show a prospective lender to get financing to buy out the Option.

I agree with Account Closed We do lease options in Arizona for 3-5 years. We don’t allow our optionees to lease out the property to others though. We look for end buyers for our properties to do lease options with.

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@shiloh 

@Shiloh Lundahl , are you still doing lease options?   Do you do them in CA?  When I collect a deposit from the tenant buyer,are there any limitations on that per Dodd Frank?  In other words, can a property listed at $400,000, get a 5% option fee for $20,000?  That is way higher than the $5000, some people suggest. What are you doing?

@Joe Yobaccio If the 20k is looked at as a deposit then you may have some issues with Dodd Frank. We call the money they put down an option fee.  It is similar to buying options in the stock market.  If you buy an option, you are not actually buying the stock.  You are just buying the right to buy the stock at a certain price.  If the stock goes up considerably and you have a call option on it then your option goes up because you have the right to buy the stock at a price below the market value.  You could then exercise the option and realize the gain or you could sell the option.  The same thing applies here.  Let's say the tenant buyer pays 4k to buy an option to purchase the property for a specific amount in 4 years, lets say 185k.  The value of the property today is 170k.  If the property goes up to 195k because of inflation during the 4 years then the tenant buyer still has the right to buy the property at 185k.  If the property value goes down to 160k, then the tenant buyer will probably not exercise their option but will walk away from the property and they will save all of the money they would have lost by trying to sell the property at a loss.  

We don't apply the option fee to the purchase price and we don't apply any rents towards the purchase price either.  This keeps it from looking like a mortgage in disguise.  

As far as charging 20k for an option fee, I think that is reasonable for the price point.  Especially because California prices go up so much.  We usually increase the price by 5-10% and charge a $3900 option fee.  Recently I had a tenant buyer say that he wanted to buy the property in a year so instead of increasing the property 5-10%, we did it on a scale of 3% per year for a 4 year period of time.  So if he exercises the option in year 1 or 2 then he buys if for less, if he exercises it in year 3 or 4 he will end up paying more then the original option amount offered.  So there is some incentive there for him to exercise the option early.

Anyway, I hope this helps. Good luck.

Thank you @Shiloh Lundahl .  $3900 for an option fees seems reasonable and doable.  As I don't already own a propety, I would have to acquire one and getting one by lease option first and then subleasing, seems like a great strategy. That seller will likely want option money and that makes sense. I can put it up initially or get it from my tennant buyer.  But, I would also like to make a little spread.  The price points here are higher, but someone who is renting with hopes of buying in 2-5 years isn't necessarily going to have a chunk to use as a non refundable option fee.  So, I'm trying to explore this and see if what I'm trying to do has been done.  If rent here is $2000 a month, then a renter would put up 1st and security of $4,000. I'm assuming, I would instead take an option fee vs. 1st and last and to make a spread, make sure I get more than I offered the seller.   Have you done any of these in Ca or just Az?  

@Joe Yobaccio I have not done any sandwich lease options which sounds like what you are discribing. We sell properties on lease options that we already own ourselves. So you may want to search for sandwich lease options in the search bar.

I heard on a podcast from a mastermind that you can Not do a lease option for more than 12 months without it being considered Seller Financing! He said that you can set terms for the Seller for however long you want, but for the Tenant Buyer it cannot extend a year because it is illegal! If your Tenant Buyer needs more time, he said you will have to include an option to extend terms clause in your contract.

Is this correct? Are any of you guys doing this??

Btw, Im new to all of this.....

@Shiloh Lundahl , that is quite interesting. you do NOT apply the option fee to the purchase price  .......... i guess , because your option fee is reasonable , but if someone is optioning a 300,000 house , with an option of 25 K , i am PRETTY sure , they will ask that to be deducted from the final purchase price

@Alex Mikhals we mark our properties up 5-7% above the current ARV to account for inflation. And we set an option price 4% per 100k. So for a 300k house we would charge a 12k option fee and we would not have that go towards the purchase price. If they didn't like that we would tell them that the can purchase it from us right now at market value without the option fee. But if they want the property and are not able to qualify for it right now then they would need to pay the option fee.

I’m needing some advice please. We have a house that we did a lease option to purchase almost 2 years ago and the contract expires in a two months and the renter is trying to back out. He is stating he needs a “newer home” and can’t get “financing”. We had him sign a contract that specifically states he will “forfeit the non refundable option to purchase” if he does not purchase the property. Now he is asking for it back...

@Kimberly Norris I would just have a conversation with the tenant that would go something like:

Tenant: I want my option money back because I need a newer house and I don’t think I’ll be able to qualify for a loan on this one.

Owner: What do you mean?

Tenant: Yeah, I’ve decided not to buy the house so I just want my option money back.

Owner: I hear you. When we originally signed the option agreement, what did you understand the option money was for?

Tenant: Well, I thought that it was going to be part of the down payment like earnest money and now that I’m not not buying the house I want it back.

Now how messy this gets is really up to the way that your docs are written. If they say that the option fee will go towards the purchase and he gets a lawyer involved then you may have a problem. Our docs explain thoroughly that the option fee is just that - a fee. And none of the option fee goes towards the purchase of the property and there are no monthly rent credits that go towards the purchase either. And the lease agreement and the option agreement are two separate documents. Let’s assume that you’re docs are the same or very similar to mine, then this is how I would continue the conversation. If they are not , then I would refund the tenants money and go get better docs.

Owner: I got it, that is why you are asking for that option money back, because you believed that it went towards the purchase. Here let’s take a look at the agreement one more time together. (Shows copy of agreement) Here, where it talks about the option money in the option agreement it explains that the option fee is just a fee that one pays for the right to buy the house or not and further down here it states that the option fee does not go towards the purchase of the home. It’s kind of like buying concert tickets. Just because you bought the tickets doesn’t mean you have to go to the concert, but you aren’t able to go back to the ticketing booth and ask for a refund for the tickets because you decide not to go. But really, I’d love to give you that option fee back, you’ve been a great tenant, however, if I deviate from the lease agreement or option agreement then I open myself up to all sorts of legal problems for not following the contracts and showing favoritism towards certain tenants and not others and from what I’ve learned over years of being a landlord is to always follow the contracts. But this is what I can do for you, if the home is nice and clean, and everything is in working order, then I can give you back all of your security deposit. I wish I could do more, but that is really the best that I will be able to do.

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Great info in this thread!  Does anyone know the technicalities of setting up a LO with a seller that has tenants currently in place?  How do you navigate the lease that is between the seller and their existing tenant?  I would assume that lease still holds water but the lease isn’t between you and the current renter which makes it a bit weird.  Is this even possible?

@Marc Izquierdo I’ve never heard of an owner selling a property on a lease option to someone when they already have a tenant who is leasing the property. Instead, they sell the property with the current lease in place.  They may also sell the property “subject to” and you take the property over and then the lease with the current tenant becomes a lease with you.

@Shiloh Lundahl thanks that’s good to know.  I guess since the property is already leased out, they wouldn’t really need another lease.  Just wanted to see what to expect.  I appreciate the input.