Rental turned Lease-to-Own

[David Stone]

I have a single-family rental house with an excellent tenant who has expressed interest in purchasing the property on a rent-to-own contract.

My question is:  

1.  What is the best setup for a lease option agreement?   Should rent be increased?  Should rent credit be applied toward purchase with the increased portion of rent?  (Rent is currently $1000 a month which is high for the area, median is $900)

2.  What should I charge for an option fee?  The option fee will be non-refundable in the event of default or choice not to purchase, but should it be applied toward the purchase price typically or is it just money collected for the option to purchase a property in that manner?

3.  How should I price the property?  I have always heard to aim toward what the market value would be at the end of the option period (3 years).  Has this worked best for you?  What would you suggest?

4.  Looking at the numbers and the background below, would you rather sell the property on a lease option or refinance back to a 30 year loan (could cost $4000) and collect $40 a month profit (but make positive cash flow).  

I will show numbers at the end of this question to help...

I am looking for what has worked for you in your personal experience.  I have been educated by a few programs on this topic but would like an unbiased view from the BP community.  

Thank you everyone for your time responding to this!!!
David Stone
Elma, WA

THE NUMBERS: 

Our purchase price in 2009:  $155,000

Currently owe:  $136,000

Mortgage: $1080 / mo (PITI)

Rent:  $1000 ($100 above median, but house is newer condition than neighborhood), Tenant pays all utilities

Property:  3 bed, 2.5 bath, 1576 sq ft, built 2008, located just outside Shelton, WA

Fair market value:  $166,000 according to Zillow private estimate of comps 

I am looking to make a minimum of $35,000 from the sale of the property to make it worth it

BACKGROUND:

This certain property was not originally purchased for a rental.  This is the house we bought at market value back in 2009 before we knew anything about the market crash.  It was a foreclosure and we thought we were getting a good deal until we found out years later that our property was worth appx. $30k under what we bought it for.  We were paying $1100 a month for mortgage at that time and were sick of our high monthly payments.  We were seeking financial freedom, so our step toward our goal was to rent out the house and purchase a cheaper one (which we did, for $35k).  

We do not make money on this house alone. We can collect $1000 a month rent and the mortgage is now $1080. We also pay a annual HOA of $180, plus maintenance, etc. (Although, our duplex more than covers the loss, this property was a means for us improving our financial situation and allowed us to get into the investment game).