Selling my House on a Lease Option

[Doug Vigliano]

Hello BP Community.  I wanted to get a consensus, I am relocating to Austin and selling my primary residence here in Orlando, FL ..... I am selling on a lease-option, but I'm curious how many of you would have sold outright?  Here are the details below.  

- $22,500 option fee, 3 year lease @ $2,000/month (about $100 in Cash Flow), $312,500 purchase price (to be closed within 3 years) Effective price of $335,000 ... Owe $265k on mortgage, so when it closes will net around $50k for a total profit of $75000 +/- including cash flow.  Tenant-buyers are actually our neighbors, high income earners but self-employed, need 2 yrs of tax returns for mortgage. 

-If I sold outright, I would walk with about $45k +/-, house could appraise for low $320's .... This would put me walking away with twice as much now versus waiting on more later ... 

Thoughts?  I've already collected option fee, but I'm just curious to see who out there would have sold outright 

[Mike B.]

Doug, you are think about two almost opposite scenarios here.  If you sell now, then you transfer title and get paid now (30-60 days from now).  If you lease option, then you hold the property as a rental for your lease term, offering the Option for your renter to purchase.  If everyone wants to guarantee the purchase, then consider a Lease Purchase transaction or something like a contract for deed, land contract, seller financing, etc...  Either approach is fine, but it really depends on your goals and circumstance.  Do you want just move on right now and be done with the property, do you need the cash now for something else, or can you wait?  Also you said you already collected an option fee, so it seems like you have already signed all your agreements and you're now locked in to doing the lease option.

A few more things for Lease Options in general --

There are tons of ways to structure these transactions, every state is a bit different. Just a few points for you to consider to hopefully get you on the right track:

* Option to Buy and Lease are separate documents with separate purposes.

* Tenants pay a NON-Refundable Option Consideration Fee in order to receive that option. The fee locks in their rental rate, purchase price, and reserves the property for them to have the option to buy so you cant sell it to someone else during the option term. If they don't buy, they lose the option fee funds. If they purchase, the option fee amount paid will be reduced from the purchase price to lower the purchase price on the sales agreement, after they exercise their option to purchase.

* The property is not sold and title is not transferred until the tenant exercises the option to buy. Therefore the tenant remains solely a tenant, just renting the property, until they choose to purchase. The tenant has no equitable interest or rights in the property until they close escrow/title.

* Set a Fair and Realistic purchase price that will be fixed for the option period. The price generally will be current fair market retail value or if you can reasonably account for appreciation during your option term and set the price accordingly.

* Option term should be no more than 5 yrs max. Ideally you offer 2 or 3 yrs depending on your circumstances with an option to have a one time 6 or 12 month extension. Rent rates and purchase price can be adjusted if the option is renewed/extended at that time. The 2-3 yr time frame is key for several reasons, mostly for seller/owner profits and tax purposes.

* Do Not offer "Rent Credits." Only charge reasonable fair market value rents (maybe higher end of the rent range). Do Not offer anything as a "deposit," "down payment," or "credit," prior to opening escrow. This lends to going down the path of possibly providing the tenants with financing, installment contract, disguised sales, delayed closing transaction, equitable interest, refunds, lawsuits, loss of profits... etc. There are easy ways to accomplish the same things and provide the tenants with an incentive, without creating the liabilities.

* And of course one of the biggest benefits for the owner/investor is that when doing the lease option, the tenant will be responsible for all utilities and maintenance. You can also structure in some additional terms about who and how significant repairs are handled, but that will also tend to tip in the owner/investors favor.

* When selling a property on a lease option, realtor commissions are not necessary.

* Check your state laws and talk to a REI attorney and escrow/title company about facilitating the transaction and all the needed paperwork for your area. Conduct additional research on the strategy as well.

* Always be Honest, Reasonable, and Fair. Act in good faith. The lease option, especially on properties you own, can be a really good, hassle-free(ish), REI strategy that creates win-win solutions. There's more to it when you get into the details, so look into it a bit more. Good Luck out there.

Lots of benefits and certainly worth checking out more if you're interested in pursuing that strategy.