Questions about rent to own

[Ben Russell]

We just finished a flip that is listed on the MLS. We decided to also offer it as a Lease with a 3-year option to buy. Having never done one of these, can I get some feedback on how we structured the option and pose some questions:

-Option price would be $263k (listed at 260)

-3-year option.  Each year the option is not activated, the price increases 1%.

-1750 monthly, with a $150 credit going towards the purchase price/down payment.  Rent credit is non-refundable. Market rent is around 1500-1600.

-5% option fee going towards the price/down payment.  This amount is not refundable and would be based on good credit (% would increase for credit below 730).

-Would still ask for a security deposit and our standard rental qualifications.

-Additionally, a lawyer would draft the lease and option contract.

Questions:

-Will most lenders accept the option fee and rental credit at closing as a seller concession, going towards the buyers down payment?  Is there a better way to ensure the money can be used as part of the buyers down payment?

-A few people have asked if the options fee and credit is escrowed.  Is this standard practice?  I get the safety net for the buyer, but at the same time we cannot sit on that money for up to 3 years.

-Is there any other considerations?

Thanks!

[Account Closed]

Quote from @Ben Russell:

We just finished a flip that is listed on the MLS. We decided to also offer it as a Lease with a 3-year option to buy. Having never done one of these, can I get some feedback on how we structured the option and pose some questions:

Well, I've done a lot of these and this is my favored package:

I have had lineups each time I put a Lease Option to the public.

There needs to be two agreements, an Option Agreement and a Lease Agreement. For simplicity they both need to start the same day and end the same day. Each adult needs to be a signatory to the Agreements. The contracts and how they are written is extremely important. When I've been sued, I've won.

It needs to be handled and documented in Escrow with Title and include appropriate Disclosures.

I couldn't care less about their credit. Since they don't have to qualify using a bank, there is added value to them on the transaction. I sell for 10% above market value. No step up in following years. They pay 10% as a Non Refundable Option Fee. The money is not escrowed, no need to, it's non refundable. Option fee gets applied to the option amount when they exercise the option. I offer a two year lease option. 3 years is too long in my opinion but if you are simply looking for cash flow, 3 years is fine.

Since they are providing 10% down, I don't have them put down a security deposit. The non refundable option fee is plenty. 

Their monthly payment is 10% above what the place would rent for as a LTR. Since they don't have to qualify using normal criteria, there is added value to them on the monthly so there is an up charge. Taxes and insurance costs are "covered" in the rent. (People don't pay taxes and homeowners Insurance on properties they don't own.)

They can "refinance" anytime they can qualify for outside financing. The option fee counts as a down payment when talking to future lenders.

Monthly rent has NO credit going toward the purchase price/down payment. Rent credit is not used.

If you choose to allow this, make sure you keep accurate records and don't commingle funds.
B3-4.3-12, Rent Credit for Option to Purchase

https://selling-guide.fanniemae.com/Selling-Guide/Originatio...

They are responsible for repairs and maintenance. I don't have a property manager on them since I have 10% down, they take care of the place as though it's their own. I never hear complaints, or have toilets to unplug, snakes to remove or ants to kill.

I've put together a spreadsheet that shows how all of this works. If you'd like a copy just DM me. Click to

https://www.biggerpockets.com/users/mikeh695 & Tap the message icon in the upper right corner of your screen