Tenant interested in lease option

[Lisa Green]

A tenant in one of my single-family homes has asked whether I'm interested in selling and whether I'd consider doing a lease purchase option on the house.

I have no strong feelings about this one way or another, but I'd like to get your collective wisdom before responding to her. I've never tried selling on lease-option or lease-purchase before.

[Roy N.]

@Lisa Green

If you do a quick search on Purchase Option or (the misnomer) Rent-to-Own, you will find many threads on the subject.   There is currently one taking place here (the OP is in Canada, but the concepts are the same ... regulation is now tighter in you country).

It can be a good way to sell a mediocre rental property (or one you just might wish to unload for other reasons).  Basic rule of thumb the lease is just like any other and the purchase option is an entirely separate agreement.  Do not tie the two together (either with performance incentives/penalties or financing/conversion of rent to downpayment, etc).

[Samuel Sedore]

Originally posted by @Lisa Green:

A tenant in one of my single-family homes has asked whether I'm interested in selling and whether I'd consider doing a lease purchase option on the house.

I have no strong feelings about this one way or another, but I'd like to get your collective wisdom before responding to her. I've never tried selling on lease-option or lease-purchase before.

 You should read about the differences between tenant first and property first lease option as well as the other nuances. Get familiar with the different strategies, there many ways to do it.

[John Thedford]

Get legal advice in your state. A lease/option COULD turn out great or bad. If it goes south it could lead to big problems including having to foreclose vs having to evict. Lease/option or lease/purchase or rent to own are all similar and many state courts have rulings that affect them. Get a good real estate attorney's opinion and help if you choose to go this route. MUCH easier safe than sorry!

[Bill Gulley]

In 2016, option contracts over 12 months in a term take on new stripes. You're looking at new accounting requirements that effects the tax treatment and a determination by the IRS as to an option being an installment sale.

While an option does not transfer an equitable interest in the property the buyer (optionee) acquires an equitable interest in the contract. The value of that interest is derived from the value of the real estate. The courts generally view an option in this manner and assume the option is to be taken unless intent is specifically stated otherwise. This then leads to what John mentioned, assuming the option is to be taken and having possession of the property leads to foreclosure proceedings under state law. If an optionee acquires 10% in equity or a contract or more, they are then considered a buyer under an installment sale.

As a landlord the exemptions from Dodd-Frank consumer lending rules do not apply as a homeowner selling their own residence. There is an exemption available to those selling one property within 12 months, but there are still loan requirements, including no balloon payment being required until half of the principal has been paid over an amortized period. Even if you have this exemption you're still responsible for the loan originated being in compliance so it's best to see a licensed mortgage originator. Attorneys usually aren't mortgage originators, but one may be.

Today, while compliance has changed, options are still a valued strategy when done properly, with attention to detail. They are not complicated but the devil is in the details. 

I'll mention too, that selling under an installment agreement will trigger 25% of the table depreciation taken from your rental will be due from the sale, so your tax obligation should be figured out to ensure you have enough of a "down payment" to cover tax liabilities. The plus side is that the gain on the sale accrues interest and is tax deferred as a percentage of the principal received.  

It's pretty much all here, well, not everything you need to know, but a lot, on BP. Good luck :)

[Lisa Green]

Sounds like it would be simpler to tell them I'm not much interested in lease option, but if they want to do a straight purchase ...