How to determine future purchase price of a home when doing a lease option sandwich

[Charlie Gonzalez]

Good afternoon BP,

I am a new investor starting out my business model with lease option sandwiches.

My question is: how do I determine the future value/purchase price of a home when structing the lease option sandwich agreement? Is there a tool I can use to propose a future value? Or would a realtor have better insight on this matter? I would rather not just propose a random future purchase price. 

Lastly, how am I able determine the future purchase price I have with the seller, and the one I have with the sublessee/tenant buyer?

Thanks and please let me know!

[Brad S.]

Quote from @Daniel Beck:

My guess is because an appraisal is an objective measure of the property value as it is done by a third party expert (instead of the value being determined by the seller or renter, which has obvious conflicts of interest).

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@Daniel Beck  There's no conflict of interest between a seller and a tenant/buyer. Both of their interests are inline with their own obligations/responsibilities - both are focusing on negotiating a deal advantageous to themselves.  An example of a conflict of interest would be with a Realtor negotiating to buy a property directly from their client, since the Realtor has a fiduciary responsibility to their client, so their interest in getting a good "deal" on the property would conflict with the fiduciary duty of putting their client's interests ahead of their own.

I get what you are trying to say, but I think you are getting tripped up a little. As a seller, you would want to negotiate a "future property value" which fits you profit objectives for that specific deal. You wouldn't want to contractually commit to selling it based on what an appraiser tells you it is worth, at a future date, or you could setting yourself up for a loss - literally, having to PAY the tenant/buyer to buy the house!  Example: What if I picked up a lease/option deal in 2006 for $400k (my purchase or agreed upon purchase price to the seller) and watched it fall to a value around $200k, around 4 years later (2010). If I had it as a lease option, in which, I contractually agreed to sell it to my tenant/buyer 4 years later for the appraised value then (in 2010), I would literally, be obligated to sell it to them for $200k and possibly be liable for damages ($200k) if I didn't! That doesn't sound like a risk I would want to take!

You, as the seller, are in control of what you want out of the deal. So, you decide how you want it to go. Now, you can say "the tenant/buyer agrees to purchase the house within the next 4 years at the appraised value, at that future time, NOT TO BE BELOW $450K, etc, blah, blah, blah. But, I would never agree to anything unknown without a safety net. Read my previous post for additional info.

If your L/O training isn't pointing things like that out, then search for better training.