Why I’m Not Closing this Lease Option Deal

When the market was hot I picked up a newer townhouse in a great subdivision. It was close to the highway and in a very desirable part of town. I got it from an absentee landlord who was tired of tenant hassles and was more than happy to enroll in my “guaranteed rent” program.

Of course I got immediate cash flow from the lease option deal and I also had substantial equity that would have given me a nice $70,000 payday.

Since this property was in such a great location I was quickly able to fill it with a tenant/buyer. The tenant/buyer gave me $7,500 in option money and has been a dream tenant. He’s always paid his rent on time and I’ve never had a problem over the last two years.

Recently he called me and said he was ready to exercise his option and purchase the property.

We started going through the motions of selling the property, however, the appraisal came in significantly below his option price. This is no surprise of course, because of the current state of the real estate economy. So what did I do?

I gave the tenant the option to stay for another 6 months and we’d re-appraise the property then and I even told him I’d be willing to give him a slight discount off of the original option price.

But the tenant wasn’t interested and frankly, I don’t blame him. He could easily get a property in the area for cheaper than I was willing to sell to him. You see, if this property was a dump in a war zone, I would be willing to give it away to him.

However, like I said, it’s a good property that I don’t mind holding onto for the next several years because I get healthy cash flow from it. I’m not willing to get rid of this property for nothing when I get can solid cash flow and make some money off of it in a year or two.

Should this ever happen to you, you have basically two choices…

You can sell the house to the tenant buyer for what it appraises for and lower your option price. (Assuming it’s not underwater). Or, you can give the tenant the option to stay longer and hope the equity increases over the next several months.

If you’ve got a great property I’d be in no hurry to sell, but if it’s a nightmare property don’t be foolish and hold onto it thinking you’re going to get the big bucks down the line.

By the way, this is only the second time this lease option situation has occurred to me and the first time the tenants chose to stay in the house indefinitely.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.