Creative Lease Option for my rental

Member since 2020 · 15 posts · 4 votes

I currently have a house for sale in Soldotna, AK. Currently listed for $289,000 it’s a 3bed/2bath 1000sq ft. Can you tell me what you all think of this?

Lease Option Payment $75,000

Monthly installments: $1500

Term: 3 years

50% of payments go toward purchase price

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Joe VilleneuvePro Member

Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes

Don't give rent credits. That will only get you in trouble. Just calculate what the total rent credit would be if you did give them monthly rent credits. Subtract that total from the option price. This way, you're not giving any credits, The buyer gets the value of the would-be credits (but only if they exercise their option), and if they don't exercise their option, you still get the full rent amounts.

There would be two contracts involved, the option contract, which gives the buyer the right to buy at a guaranteed price, and ultimately the contract to buy. These are two separate contracts. The money upfront is the cost of the option, called "option consideration". The option is a contract to buy the property at the seller's option. They are paying for that right to buy at the agreed upon price. There is NO credit given for this.

NEVER connect the rent agreement and the option agreement in any way. They are separate contracts.

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Bill B.
Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
1w
I don’t know if you find someone with $75k laying around who can’t qualify for a mortgage but if you do….
Make it at least 5 years, or you can’t give rent credits. Check your state laws for more restrictions, be ready for a minimum of $75k in damage to the house if they can’t purchase at end of the term. Don’t forget you are still responsible for all repairs while it’s being rented.
Lastly, consider you didn’t know these obvious things Google could have told, you. What else don’t you know? Please be careful if your intent isn’t to just keep the lease option payment and repeat. If it is, be VERY careful. Maybe just do standard seller financing with a 5 year balloon. Good luck.
- Federal Minimum for Balloon Payments: If the transaction is treated as seller financing under Dodd-Frank exemptions, any balloon payment cannot be due in less than 5 years (60 months). [1]
- State-Level Strict Limits: Certain states heavily restrict long-term lease options. For example, Texasrestricts lease options to 180 days (6 months) or less; anything longer is legally classified as an executory contract subject to severe penalties. [1]
Key Structuring Thresholds to Avoid Dodd-Frank Encroachment
To ensure a lease option stays a lease option—and doesn't accidentally trigger federal mortgage underwriting laws—comply with the following guidelines:
- Eliminate Rent Credits: Do not apply a portion of the monthly rent toward the final purchase price or down payment. Rent credits create equitable title, converting the lease into a disguised installment sale covered by Dodd-Frank.
- Keep Agreements Independent: Draft the residential lease and the purchase option agreement as two separate, standalone documents.
- Upfront Option Consideration Only: Charge a non-refundable, upfront option fee rather than monthly equity accumulation.
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Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
1w
Don't give rent credits. That will only get you in trouble. Just calculate what the total rent credit would be if you did give them monthly rent credits. Subtract that total from the option price. This way, you're not giving any credits, The buyer gets the value of the would-be credits (but only if they exercise their option), and if they don't exercise their option, you still get the full rent amounts.
There would be two contracts involved, the option contract, which gives the buyer the right to buy at a guaranteed price, and ultimately the contract to buy. These are two separate contracts. The money upfront is the cost of the option, called "option consideration". The option is a contract to buy the property at the seller's option. They are paying for that right to buy at the agreed upon price. There is NO credit given for this.
NEVER connect the rent agreement and the option agreement in any way. They are separate contracts.
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Don KonipolBusiness Member
Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
1w
Real good advice from @Joe Villeneuve and @Bill B.
Option payment at 30% of purchase price is probably not realistic. Most investors on the “sell” side would accept a $10,000 option fee.
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Adam Summerer
Lender · Franklin, TN · Member since 2026 · 110 posts · 29 votes
1w
One thing to check from the buyer's side: when they go get a mortgage at the end, a conventional lender generally only counts the part of each payment that's above market rent as credit toward the down payment, and they'll want the lease plus proof of every payment. So if $1,500 is about market rent for that house, that 50% credit may not count the way your buyer expects. Worth having a lender look at the structure before you sign so the exit actually works.
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Hossein Sharifi
Investor · Member since 2023 · 133 posts · 68 votes
6d
@Ben McPhail Running it out: $1,500 x 36 is $54K, and half of that is $27K of credit. Add the $75K and the buyer has $102K toward the price, leaving about $187K to finance in year three.
Two things I'd pin down. First, is the price locked at $289K? If values rise 3% a year, the house is worth about $316K by then, so you've sold it forward at today's price. Second, compare your mortgage, taxes and insurance to the $1,500. If carrying costs are $1,700, you're paying to wait. That said, $75K non-refundable up front is a serious buyer. Most lease-option buyers bring far less.
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Noah WrightBusiness Member
USA, Nationwide · Member since 2024 · 302 posts · 117 votes
4d
Asking before you sign is the right call. A seller lease option is easy to set up and hard to unwind once someone has paid $75k and moved in. One thing nobody has raised yet is the loan on the house, if there is one. Most mortgage and deed of trust docs carry a due on sale clause. The federal exemption for leases only covers leases of 3 years or less that have no option to purchase. Your deal has the option, so your lender could treat it as a transfer and call the loan. Whether they enforce it is up to them, not you, so that's worth knowing before you hand anyone keys. A creative sale only holds up if the loan underneath it allows it. Is the Soldotna house free and clear, or is there still a mortgage on it?
[email protected]737-773-3717
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Ashish AcharyaBusiness Member
CPA, CFP®, PFS · Sarasota, FL · Member since 2017 · 5k+ posts · 3k+ votes
2d
Ben, I think the structure is interesting, but I’d have the lease option reviewed by both a real estate attorney and CPA before signing it. The tax treatment can depend heavily on how the agreement is actually structured.
The $75K upfront payment is the first thing I’d want clarified. Is it an option fee, a down payment, nonrefundable consideration, or a credit toward the purchase price? Those aren't necessarily treated the same way.
I’d also pay close attention to the fact that 50% of each $1,500 monthly payment is credited toward the purchase price. That can make the arrangement more complicated than a standard landlord tenant relationship, so I wouldn’t assume all of the payments will simply be treated as rent for the three year term.
I’d also make sure the agreement clearly spells out what happens to the $75K and the accumulated rent credits if the buyer doesn't exercise the option.
The economics may be attractive, but I’d get the legal characterization and tax treatment nailed down before taking $75K and entering into a three year agreement.
Happy to connect!
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