Selling on Lease-Option? Feedback would be appreciated.

Fort Lauderdale, Florida

Creative Real Estate Financing

Selling on Lease-Option? Feedback would be appreciated.

Specialist · Miami, FL · Member since 2017 · 82 posts · 40 votes

Hi!

Calling all lease-option pros!

I have a single-family house that is currently a short-term rental but it's just not making the amount of monthly cashflow it needs to be worth the extra hassle.

Now, could I keep it as a regular rental?

Yes, but cash flow would be a few hundred bucks a month at best and that's if nothing breaks.

This was a 1031 exchange as well. I sold a property in Chicago and exchanged the funds for this property in Fort Lauderdale.

My idea (feel free to poke holes in it) is to lease-option the property in April to someone who is willing to put down 10% for the Option.

The house is worth $650k, so 10% is $65k down.

It has a pool, 3 bedrooms, 2 baths, and is in great shape with recently remodeled baths and kitchen. It's a nice house in a nice neighborhood.

I would give them at least 2 years to exercise the Option.

I know I'll have to pay the capital gains taxes the year they exercise the Option (or could I do another 1031?)

The benefit to me of selling it on a lease-option today would be the upfront $65k cash and getting someone in there who will take care of the home because they are planning to own it.

It's common to allocate a certain percentage of the rent towards the principle, right? What's a good number?

I also heard it's a good idea to make the purchase price at the time of exercising the Option contingent on appraisal. Yes or no?

Thanks in advance!

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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
2y
@William Salas, you could do a 1031 when they exercise the option. That's no problem at all. You'll pay tax on the option money.
I would not recommend any sort of reduction in principle in exchange for rent. This creates a beneficial interest in the property for the tenant. And if something goes wrong you now have to foreclose instead of evicting.
And it would also jeopardize your 1031. Since the payments of principle could create a deemed sale. which would keep you from 1031ing when you later sell the property.
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Shawn Parsh
Real Estate Investor · TN · Member since 2010 · 294 posts · 160 votes
2y
Congratulations on the purchase. I have used lease options many times and your thought process is solid. I don't know the numbers involved like how much you owe, but I would look at the benefits of selling it outright now or doing a lease option. I like lease options because in many cases the person never actually buys the house and I get to keep the non-refundable option payment and do it all over again.
As far as having part of their rent go towards the purchase price I always give the potential buyer the option to make that decision. I would give them two rent options a lower price and a higher price option. If they select the lower price option then none of the rent income goes toward the purchase. If they select the higher amount then part goes toward the purchase price. That gives them some flexibility if their monthly cash flow is a little tight right now.
As far as making the deal contingent on an appraisal at the time they actually exercise their option...I never have. I have always agreed on the price at the time the lease option was signed. I always took into account what I expected the property to appreciate in the option period. If the property appraised 30,000 below your agreed price it would not be an issue if they already put down the 65,000 you referenced.
As far as the amount you require for the lease option I would not limit yourself. Advertise the property as a lease option and gain as much interest as you can. Then I would show the property to everyone that is interested at the same open house time frame. I would have applications on hand for anyone that is interested. On that application it would have a blank space for the potential buyer to write in the amount they can put down and what they can pay a month. With everything else being equal I would than select the person that can put down the most money with the best monthly rent income. The key is to let everyone that is interested know that you fully expect the property to go fast and the option payment and rent income will be a major factor in your decision.
If you get several offers, which I expect you would, you then have the name and contact information of other potential buyers. Not only do you have that but you also know how much they can put down, what they can afford a month, and what type of property they are looking for in what area. Then you just need to go find the next house to meet each of their needs.
Sorry for getting long winded...hopefully something I said will be of use to you my friend.
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William Salas
OP
Specialist · Miami, FL · Member since 2017 · 82 posts · 40 votes
2y
Quote from @Shawn Parsh:

Congratulations on the purchase. I have used lease options many times and your thought process is solid. I don't know the numbers involved like how much you owe, but I would look at the benefits of selling it outright now or doing a lease option. I like lease options because in many cases the person never actually buys the house and I get to keep the non-refundable option payment and do it all over again.
As far as having part of their rent go towards the purchase price I always give the potential buyer the option to make that decision. I would give them two rent options a lower price and a higher price option. If they select the lower price option then none of the rent income goes toward the purchase. If they select the higher amount then part goes toward the purchase price. That gives them some flexibility if their monthly cash flow is a little tight right now.
As far as making the deal contingent on an appraisal at the time they actually exercise their option...I never have. I have always agreed on the price at the time the lease option was signed. I always took into account what I expected the property to appreciate in the option period. If the property appraised 30,000 below your agreed price it would not be an issue if they already put down the 65,000 you referenced.
As far as the amount you require for the lease option I would not limit yourself. Advertise the property as a lease option and gain as much interest as you can. Then I would show the property to everyone that is interested at the same open house time frame. I would have applications on hand for anyone that is interested. On that application it would have a blank space for the potential buyer to write in the amount they can put down and what they can pay a month. With everything else being equal I would than select the person that can put down the most money with the best monthly rent income. The key is to let everyone that is interested know that you fully expect the property to go fast and the option payment and rent income will be a major factor in your decision.
If you get several offers, which I expect you would, you then have the name and contact information of other potential buyers. Not only do you have that but you also know how much they can put down, what they can afford a month, and what type of property they are looking for in what area. Then you just need to go find the next house to meet each of their needs.
Sorry for getting long winded...hopefully something I said will be of use to you my friend.

This is great info!! I really appreciate it! Thanks Shawn!
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William Salas
OP
Specialist · Miami, FL · Member since 2017 · 82 posts · 40 votes
2y
Quote from @Dave Foster:

@William Salas, you could do a 1031 when they exercise the option. That's no problem at all. You'll pay tax on the option money.
I would not recommend any sort of reduction in principle in exchange for rent. This creates a beneficial interest in the property for the tenant. And if something goes wrong you now have to foreclose instead of evicting.
And it would also jeopardize your 1031. Since the payments of principle could create a deemed sale. which would keep you from 1031ing when you later sell the property.

Thanks Dave, solid points!!
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