Thoughts on this lease option deal

[Mike Lowery]

Hello BP!

I am looking to sell my residence in Milwaukee, WI due to a job relocation. The property has been on the market for approximately 4 months with a starting sales price of $129,900. There was a sale one month prior to listing of an identical house two doors down for $130,000. That house was better updated cosmetically, but my home has newer furnace, A/C, hot water heater, sump pump and drain tile (one of the few homes in the neighborhood with a sump pump). I just lowered the price to $112,000 today to get it sold and I was inquired about the possibility of renting it. Due to some other personal manners, I would really like to sell the house, so I asked the potential renter if they would be interested in a lease option. They said they would so I am here to ask if my numbers sound right. 

Purchase Price - $115,000 (Is this alright since the house is reduced to $112,000? I am assuming some appreciation during the term of the lease)

Option Term - 2 or 3 Years

Mortgage Balance as of today (~$89,500)

Current Monthly P&I and PMI - $782.10

Current Yearly Insurance - ~$700

Option Fee - $1,000 (due at signing of the contract and held in escrow to be given to seller when option come due)

Monthly Payment - $1,200 ($200 of which would be set in escrow and given to seller when option comes due)

Total Cash Flow Monthly to Seller ~ $85

Buyer would have either $5,800 (2 yr.) or $8,200 (3 yr.) at time option is due which would cover at minimum a 3.5% down payment for a 2 yr. option and a 5% down payment for a 3 yr. option. 

If Buyer chooses not to purchase the property at the end of the term, they would forfeit the option fee, but be refunded half of the money in escrow. This is a person I went to college with so I figured I would not keep all of the money held in escrow. 

Obviously this would net me more money in the future and I would also be using someone else's money to pay down my mortgage. Speaking of which, I would set in the contract that the money taken from the buyer would be paid directly to the mortgage, so they can rest assure that I am current on the mortgage during the term of the contract.

How does this look to you? Does anyone have experience with these types of deals? Who is responsible for maintenance on the property during the option term? Anything I am forgetting?

Any help would be greatly appreciated. Thank you for your time. Cheers!

[Bruce May]

Mike, I was really interested in lease options a few years ago but in my area they don't seem to be too popular so I've never done one, however, I've studied the heck out of them. I can tell you that you should have a lease and a separate option. This is suppose to protect you so that if things go wrong the two aren't tied together if you should end up in court to evict your friend.

The buyer should take care of all repairs and maintenance on the house. Get them in the mindset that they are a homeowner and must maintain their residence. That's my 2 cents... and about all it's worth.