All Forum Posts by: 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).

We recently rented a VRBO property in Denver that had that setup and I remember telling my wife we needed the same setup in our rentals.  Thanks for the reminder!!!  And, thanks for the advice.  I will make sure I check on the property... they tend to be the "I didn't want to bother you" type which can be good and bad.

Hi BP!

I have a duplex I rent out and have a tenant on one side who reported seeing mold in the corner by the ceiling above the shower.  They said they scrubbed it away with a bleach solution and haven't seen a reoccurrence but wanted me to know about it.  

Each of my tenants signs a mold disclosure, which I have included at the end of this question.  

I told them to use their bathroom fan when showering and to report any new growth to me immediately.

My question is:  

1.  If there was no mold before they occupied the unit, do they have a right to leave the property (with security deposit) if the mold is affecting their health?  

2.  Am I responsible for taking care of the problem financially or should this money be deducted from their security deposit?  

3.  How can I prove that the mold was a cause of the tenant's actions as opposed to my responsibility.

4.  Is there anything else I should know before an issue arises?

Any and all feedback is welcome!  

Thanks in advance,

David Stone
Elma, WA

Addendum to contract:  Mold and Moisture Disclosure Statement

(This is the addendum to the rental agreement that they sign)

1. ADDENDUM TO RESIDENTIAL LEASE AGREEMENT

(Mold/Moisture Disclosure Statement)

EXHIBIT A

This addendum to the Residential Lease Agreement is made and entered into this ______ day of ___________________, 20__, between DAVID C STONE(Landlord) and ______________________________________________ (Tenant) pertaining to the premises located at ______________________________________________, State of WASHINGTON, county of MASON.

There are no established guidelines for unacceptable air quality caused by mold. Mold is a naturally occurring phenomenon. Mold and/or mildew should be cleaned as soon as it appears. Mold and/or mildew growth can often be seen in the form of discoloration. The different colors of mold range from white to black, including, but not limited to, green, gray, brown, orange, yellow and other colors. Your housekeeping and living habits are an integral part of the ability of mold to grow. In order for mold to grow, water and/or moisture must be present.

TENANT AGREES to maintain the Premises in a manner that prevents the occurrence of mold or mildew growth within the Premises. In furtherance of such obligation, TENANT AGREES TO PERFORM THE FOLLOWING:

1.To keep the Premises free from dirt and debris that can harbor mold;

2.To inspect the Premises regularly for the indications and sources of indoor moisture;

3.To immediately report to Landlord any discoloration evidenced on walls, floors, or ceiling and/or any water intrusion, such as plumbing leaks, drips or flooding;

4.To not air dry wet clothes indoors;

5.To always utilize stove hood vents when cooking items that may cause steam;

6.When showering/bathing, to always utilize the bathroom fan and to notify Landlord of any nonworking fan;

7.To water plants outdoors;

8.To notify Landlord in writing of overflows from bathroom, kitchen or any other water source facilities, especially in cases where the overflow may have permeated walls, flooring or cabinets;

9.TO IMMEDIATELY WIPE DOWN ANY WATER OR CONDENSATION THAT APPEARS AND/OR DEVELOPS ON ANY AREA OR ANY SURFACE;

10.To clean upon first appearance, any mildew from condensation on window interiors, bathroom & kitchen walls, floor and/or ceilings. Cleaning is done with common household bleach. Mixture is one part bleach to 10 parts water. You may add a little dish soap to the water mixture to cut any dirt and oil on the surface you are cleaning that may hold mold. Do not add other cleaning chemicals, especially ammonia. Dispose of any rags or sponges used to clean the mold in a sealed bag;

11.TO REPORT TO LANDLORD IN WRITING AND VERBALLY THE PRESENCE OF ANY MOLD GROWTH on surfaces inside the Premises;

12.To allow landlord immediate entry to the Premises to inspect and make necessary repairs in the event mold or water intrusion is present;

13.To use all reasonable care to close all windows and other openings in the Premises to prevent outdoor water from penetrating into the interior unit;

14.To clean and dry any visible condensation/moisture on windows and window tracks, walls and other surfaces, including personal property as soon as reasonably possible. Condensation on windows indicates that fresh air is not being circulated in the home to prevent moisture buildup. Open your windows and air out your home for short periods of time to keep fresh air present. Excessive running of your heater will cause condensation in your home;

15.To notify landlord of any problems with air-conditioning or heating systems that are discovered by Tenant;

16.To maximize the circulation of air by keeping furniture away from walls and out of corners;

17.In addition to the above, Tenant further agrees to perform all responsibilities set forth in the MOLD/MOISTURE DISCLOSURE STATEMENT.

TENANT FURTHER AGREES to indemnify and hold harmless Owner and Owner’s management agents from any suits, actions, claims, losses, damages, and expenses (including reasonable attorney’s and court costs) and any liability whatsoever that Owner and/or its management agents may sustain or incur as a result of Tenant’s failure to comply or perform with the obligations set forth above or as the result of intentional or negligent action or failure to act on the part of Tenant or any other person living in, occupying, or using the Premises.

Tenant hereby certifies that Tenant has read the MOLD/MOISTURE DISCLOSURE STATEMENT, and has read and understood the contents of this ADDENDUM, and has received a duplicate copy.

Tenant Date Tenant Date

Landlord/Management Representative Date

If they left a baggie, who cares?  If they used your property as a grow-operation, that's another story.  It is a good thing that tenant is gone and you will be able to use your own judgement with the next.  In this case, I would throw away the pot and return the deposit based off the condition of the unit.

I'm not sure this would be enforceable in court and I know I would not want to deal with the headache, but you could keep the deposit, notify the tenant of your reasoning for withholding the entire deposit, and if it ever escalated to anything more you could just release the deposit beyond damages as a settlement.

The house sounds nice and from the post it sounds like it is right around market value. The two things that stuck out to me were the high down payment required to get into the investment and the low amount of monthly profit obtained, if any, after expenses (tax, insurance, HOA?, damages, maintenance, future vacancy beyond the 2 year period, etc.).

I would set aside the security of the "guaranteed rent for 2 years" and ask yourself:  1.  What is your criteria for rental properties (size/configuration, location, purchase price, money invested to obtain, profit obtained, long term strategy, etc.)   2.  Does this property fit your criteria?  3.  Will this property fit your long term life and financial goals?

My wife and I started investing by looking in the city we lived in at the time (Olympia, WA).  It felt almost impossible to obtain a mortgage under market rents without placing a significant down payment on the property.  Even at that point, I felt that we would be nearly breaking even and a lot of our hard-earned cash would be tied up.  We began looking outward and found towns with cheap purchase prices and high rents.  This is where we have focused the majority of our efforts.

I do not know your specific market or your situation.  Hopefully you find something here to guide your decision in the right direction.

Best of luck!!!

David Stone
Elma, EA

Thank you for that wealth of information, including the utility clause!  I am used to having water and sewer become a lien on the property if not paid but not electricity.  It seems like a utility that could rack up a huge bill, beyond that which I would reasonably ask for from a tenant.  I agree, screening tenants is priority #1 and I have pushed really hard to make that a priority.  I am still trying to nail down my move-in/move-out procedures, so I do appreciate those tips.  Thank you for your time!

Wow! I wish I would have discovered this BP community sooner! The blog and forum are amazing tools providing a wealth of knowledge. I am excited to keep learning, maybe share some of my own experience, and keep pushing forward toward my goals! 

My wife and I are from Elma, WA and got started in investing a couple years ago. We got sick of paying high mortgage and car payments and struggling financially so we sold the cars and rented our house. While living in an apartment, we bought a duplex owner financing with only 3% down. We now are working on a couple fixer properties and are aiming to build our psssive income.

Hi BP! We just acquired a house we are fixing up and may use as a rental.

I found out that the city water/sewer bill AND electricity both stay with the propery.  I am used to water/sewer being attached only. 

Has anyone dealt with this and what strategies have you applied to protect yourself and ensure a massive bill is not left after tenant moves out.

Should/can I request utility set a cap on unpaid balance? Early notification of delinquency? Clause in contract? Additional deposit? 

Any ideas welcome as it gives me something to work with when dealing with utility co... Thanks in advance!

David

Elma, WA

I bought an occupied duplex owner financing. The tenants stayed on the same lease they had with the previous landlord which were both month to month and the seller transferred the refundable portions of their deposits to me at closing.  I could have had them sign a new lease being that they were month to month but I decided to make the transition as smooth as possible and their current lease was a pretty good one. The tenants just signed a document informing that the ownership and landlord rights were being transferred to me.

If they were in a 12 month lease or so I'm not sure if you can have them sign a new one since they already made an agreement.

This was out first experience with rental properties so also following to see what expert advice has to say.

Good luck with your investment!

I like the idea of the bandit sign in the yard of the place were fixing. Driving for dollars is great for us having three kids, it helps calm them when they get crazy and we love looking for deals in the area!  Thanks for the advice!