Lease Option to Lease Option

[Raymond Hill]

Hello,

I wanted to know if there is anyone here whho has done a lease option agreement with seller for 6 months and lease option the property to buyer for 3 months? I was running numbers and wanted to know if someone has done this. If so, how successful was it. If not why?

[Shiloh Lundahl]

@Joe Yobaccio If the 20k is looked at as a deposit then you may have some issues with Dodd Frank. We call the money they put down an option fee.  It is similar to buying options in the stock market.  If you buy an option, you are not actually buying the stock.  You are just buying the right to buy the stock at a certain price.  If the stock goes up considerably and you have a call option on it then your option goes up because you have the right to buy the stock at a price below the market value.  You could then exercise the option and realize the gain or you could sell the option.  The same thing applies here.  Let's say the tenant buyer pays 4k to buy an option to purchase the property for a specific amount in 4 years, lets say 185k.  The value of the property today is 170k.  If the property goes up to 195k because of inflation during the 4 years then the tenant buyer still has the right to buy the property at 185k.  If the property value goes down to 160k, then the tenant buyer will probably not exercise their option but will walk away from the property and they will save all of the money they would have lost by trying to sell the property at a loss.  

We don't apply the option fee to the purchase price and we don't apply any rents towards the purchase price either.  This keeps it from looking like a mortgage in disguise.  

As far as charging 20k for an option fee, I think that is reasonable for the price point.  Especially because California prices go up so much.  We usually increase the price by 5-10% and charge a $3900 option fee.  Recently I had a tenant buyer say that he wanted to buy the property in a year so instead of increasing the property 5-10%, we did it on a scale of 3% per year for a 4 year period of time.  So if he exercises the option in year 1 or 2 then he buys if for less, if he exercises it in year 3 or 4 he will end up paying more then the original option amount offered.  So there is some incentive there for him to exercise the option early.

Anyway, I hope this helps. Good luck.