October 31, 2006
Careful What You Wish For!
So, as part of a somewhat whimsical effort to expand the universe of potential buyers for my first flip, I posted a Lease-Option / Rent-to-Own advertisement on craigslist a few weeks ago and, for whatever reason, I’ve received a number of serious inquiries about this
purchase method over the past few days. Just this afternoon I had a very long discussion with a woman who is quite passionate about the property and I’m suddenly very concerned that I may have to quickly educate myself about this strategy to avoid missing out on a good thing. I understand the basics, but I’m not even remotely prepared to process a serious applicant and fine tune the example price/terms I advertised on craigslist. Fortunately, my attorney is well-versed in lease-option transactions and would be able to work through all the legal issues with me. I’m more concerned about issues such as tenant screening and the financials behind the deal (how big an option payment should I request? what portion of the monthly rent should be applicable to the final purchase price? how much will insurance cost me? what implications does this have for my current mortgage? will I need to refinance? what do I look for in a lease-option tenant?).
Any thoughts from Fliperati readers or other bloggers are welcome. Shaun? Steve? FiveMZNYC? Trisha? Have any of you ever used a lease-option strategy to sell a property?
I am currently reading Buy Low, Rent Smart, Sell High by Scott Frank & And Heller which discusses lease options and tenant screening strategies for lease options at great length. You can pick it up for $19 at Barnes & Nobles.
Good Luck!
I’ve done lease options before. Laws vary by state, so I’m glad you are seeking an attorney. In my case, I used two separate documents - a standard lease and an option to purchase real estate. Actually, I think I wrote about this on my blog.. Let’s see.. Oh, here it is. Check out http://shaunsre.blogspot.com/2004/08/another-step-done-and-more-about.html for the details.
Search my blog for the term “lease option” and you’ll probably find lots of useful info scattered all over the place..
There is really no implication for your current mortgage, unless you obtained it as an owner-occupant. In this case, you would technically be breaking the terms of the mortgage and the bank could call it due. However, if you make the payments on time, I really doubt they will check. Call your insurance agent and ask for a quote on landlord’s insurance.
I’m pretty sure I wrote about this on my blog too, but the people who utilize lease options tend to have poor credit, so don’t expect good credit scores. I would look for a stable job history and a job that seems like it pays enough to cover the rent. Also, most lease option tenants end up NOT exercising the option to buy the property, which is why it is important to make the option fee non-refundable. Just do it again, find a new tenant, and collect another option fee.
Thanks Rick and Shaun. Shaun: I always forget how long you’ve been writing (centuries in blogosphere-years). Found lots of great anectdotal info on your site and I put together a lease option package for the couple that was interested in the house. They balked at my purchase price under the option agreement ($15k higher than the current list price) and said they couldn’t do it at that level, but they’re goo-goo-ga-ga for the house and would most likely execute the deal if I come down a little. I might go back to them if I don’t get any solid buyer leads over the coming week.
Why did I raise the purchase price in the option agreement, you ask? Well, the current list price is aggressive and lower than fair market value, so I couldn’t bear the thought of locking that level in for a whole year. Granted, the tax benefits and modest positive cashflow over the coming year would make up for some of that (even with the monthly credit toward the pruchase), but I still wasn’t comfortable with that price. Ironically, I got a call from an appraiser who is reviewing a house across the street from me while I was mulling this question the other day. He wanted to know why I had set the listing price so low (implying that I was skewing his analysis) and I told him I was trying to move the house quickly. Talking with him solidified my feelings about the option purchase price, but I may have to suck it up lower it if next week is quiet. As has been noted, the majority of lease-option tenants do not end up buying so it might be a moot point in the end…
I’ve had similar experience to Shaun. In fact, none of the lease options that I’ve executed have resulted in a sale. I cannot give any further advice than you’ve received from these other posters. Interesting comment about the appraiser, I wonder if it’s for a refinance of an ARM and they are looking for the maximum value they can get, in which case you would be skewing their valuation. Cash out refis are on the rise it seems.