Selling Rental Property With a Lease Purchase
Just as there are a number of financing options you can use to purchase a rental property, there isn’t just one way to sell one. When we purchase we have some kind of plan as to how long we’re going to hold a property, as well as the expected profit on sale.
We’re not talking about flipping here. The property we might consider for sale via a lease purchase is one we’ve held for a while, with a good tenant in it paying market rent. Or, it is one that we would sell if the price is right, and we’re looking for a tenant at market rent or better. What advantages are there for the investor seller in using lease purchase?
It could help to retain or lure an excellent tenant at above average rental rates.
We can plan for sale, with a structure that fits our timeline.
Inflation can be factored into the purchase price for the option time length.
We collect an option payment up front that is non-refundable, increasing our ROI for the year.
If the renter/purchaser does not exercise the option to purchase in the time frame specified, we keep the option payment.
If not exercised, the option frequently expires at the expiration of a lease. We are then free to list the property for sale or look for another tenant and start the process over again.
When the lease purchase agreement is executed, we get an up-front option payment from the tenant/purchaser. It is optional if we allow it to apply to the down payment when they purchase. Either way, we keep it if the period runs out and they are unable or unwilling to purchase the home.
Basically, we are allowing the tenant the option to buy the home at the end of a specified period at a specified price. This need not be a number, but could be at a price indicated by an appraisal at the time of the exercise of the purchase option. Using the appraisal method, you do not risk leaving money on the table during a period of rapidly rising prices. Virtually any mutually agreed-upon method for valuing the home can be in the agreement.
The value that many investors place in the use of lease purchase arrangements is the ability to acquire a top-notch tenant who wants to own, but cannot afford it at the time. They are willing to pay top rents and a fair price for the home in return for the security of an agreement that they can purchase at some point.
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Upfront Option Payment
I am currently negotiating with a potential renter who may want to purchase the home.
We agreed upon what I believe is top rent for the property at $550/mo which will cover our payment and taxes and insurance with about $60/mo cash flow.
If they want to lease purchase, can I leave the rent the same, give them 6 mos - 1 yr. to come up with the down payment, or should I figure in additonal monthly amount of money to go towards the option payment in one year. (we are asking for 10%, $5,000) Then, we would finance for them for 2 years (amort. for 20) with a ballon. This would give them time to establish credit, etc.
The reason for the balloon is because our new mtg. on the property has a balloon at that time.
This is a property that we really want to get rid of because it is 2 1/2 hrs. away from us, so we are selling for what we have in it, just to unload it. Based on last appraisal a year ago, we are asking $15,000 below appraisal but close to value for today's market.
Any suggestions would help as I have never done a lease purchase.
Thanks
Trying to get started.
I have look at property.s But trying to fine an investor it not easy .I,am scared I have a house that i would like to purchase but i cant have another mortgag .Should i make an offer ? please HELP!
lease option
Jan, I did a lease option on the home I lived in a few years ago. If you have a time issue of when you need to have home sold, be sure to write contract with enough time to compleat sale before that date. In order to avoid capital gains taxes, I had to live in home for two of the last five years. I set up contract so that buyer needed to close the sale in 2 1/2 years which gave me six months to sell the property if tennant decided not to buy. I was applying $200 of each months rent to purchase. Tennant could not qualify for loan, so I sold the property in conventional way. I closed deal with two months to spare and pocketed considerable profit from outrageous appreciation over that time.
Al
Thanks Al,
I think they want to save up the down payment and then buy the house, at which time we will hold the mortgage with a 2 1/2 yr. balloon.
If I can work out a lease option where they put money down every month towards the option payment, then I will do that, but I still need to have them finance it in 2 1/2 years because we have a balloon on it ourselves. Otherwise, I guess we would sell it the conventional way, like you did.
They are putting down a rental security deposit tomorrow and signing the lease Oct. 31. We are just happy to have someone in the house!