Lease Option

[Marilyn Bump]

I have a rental home and my renter wants to purchase it. I don't believe, with the market the way it is, that the home will appraise for what I owe on it. My renter has mentioned doing a lease option and I am not opposed to that idea but my question is how do we set the price if the option would not be exercised for 24-36 months?

[Andy J.]

You have a few different ways to approach this. You could always sell for whatever the appraisal is when your tenant/buyer is ready to purchase. Of course you run the risk of getting a lowball appraiser, perhaps the higher of two appraisals or the average. You can sell for the remaining balance of your mortgage at the time of sale. You can try to estimate market appreciation and come up with a number. You can add a certain percentage per month on top of a base figure. There are infinite possibilities, you have to decide what's best for you.

There is a calculated risk in setting an option strike price and term. If you were to collect an upfront option consideration its value would include intrinsic value as well as time value. You can credit that consideration to the purchase or you can choose not to. Look at your mortgage amortization to figure out when the future home value will be in line with your remaining loan balance.