~A Bunch Of L/O Questions~
I'm considering lease optioning a brand new SFH I just closed on. Initially I was going to rent it out conventionally but with the market rents right now, I will be at a significant negative cashflow per month. Lease optioning would get me out of that and put me into a small positive cashflow and significant option money upfront. I have one perspective T/B that wants to take a look at the property tomorrow and I want to be prepared when offering this L/O. I advertised as follows for the terms:
"Lease $1600mo
Option Money $8K, but somewhat flexible
No/Bad Credit OK, but income must be sufficient enough to handle payments."
A T/B emailed me saying that he has $6K now for the option money, is able to afford the $1600 mo payment, but has a few dings on his credit because of bad student loans. He also mentioned that he is a family man and has been married for 10 years.
Questions:
1) With the $1600 mo payment, I'm offering no rent credit. I will try to get $7-7.5K for option even though I can live with $6K. But would it be okay to offer a higher mo payment say $1650mo (w/$7K option) and $50 toward rent credit or $1700 mo (w/$6 option) and $100 toward rent credit? Are those reasonable numbers? Should I be asking more or less?
2) What's the best way to determine a future set sales price? How would I figure the yearly appreciation? In this region, 25% was the rate of appreciation two years ago and then steadily it has been anywhere from 12-16% per year based on Dataquick. Ultimately I want to get the most for the house when the option is exercised but want to be able to price it fairly so that the T/B doesn't run into any appraisal problems when searching for a conventional loan. Any suggestions?
3) In a L/O does the tenant/buyer pay for all the utilities?
4) Say the T/B for some reason can't make payments, can I just go through the normal eviction process? Can I put in the agreement that if it comes to that point, any rent credit previously collected is non-refundable like the option money?
5) I will definitely have a real estate attorney look go over the paperwork before signing. Where can I get a good draft/copy of a lease and option agreement? Would any of you have well-worded agreements you can fax to me?
6) Am I missing anything else regarding the L/O? I want to protect myself as much as possible. If there is anything else anybody here can suggest, I would greatly appreciate it. Thanks very much for your replies.
-Leo
Another question:
7) Will I get taxed for capital gains on the option money I collect? If so how much on average will it be for say a $6K collection?
Hello, here's some answers...
Questions:
1) With the $1600 mo payment, I'm offering no rent credit. I will try to get $7-7.5K for option even though I can live with $6K. But would it be okay to offer a higher mo payment say $1650mo (w/$7K option) and $50 toward rent credit or $1700 mo (w/$6 option) and $100 toward rent credit? Are those reasonable numbers? Should I be asking more or less?
*** Depends on your situation.. You should try and get at elast 3-5 % for option consideration. Charge market rent or a little higher***
2) What's the best way to determine a future set sales price? How would I figure the yearly appreciation? In this region, 25% was the rate of appreciation two years ago and then steadily it has been anywhere from 12-16% per year based on Dataquick. Ultimately I want to get the most for the house when the option is exercised but want to be able to price it fairly so that the T/B doesn't run into any appraisal problems when searching for a conventional loan. Any suggestions?
*** I would do the same thing that you already did. You used comp data to back calculate appreciation. Unless soemthing major happens to market or local neighborhood, you should expect about the same appreciation in the last few years***
3) In a L/O does the tenant/buyer pay for all the utilities?
*** Usually, but you could if you want. Its your agreement ***
4) Say the T/B for some reason can't make payments, can I just go through the normal eviction process? Can I put in the agreement that if it comes to that point, any rent credit previously collected is non-refundable like the option money?
*** Remember, you have a landlord/tenant relationship, so yes you can evict him. You could have any previously collected monies as liquidated damages.***
5) I will definitely have a real estate attorney look go over the paperwork before signing. Where can I get a good draft/copy of a lease and option agreement? Would any of you have well-worded agreements you can fax to me?
*** NO , buy a course.. the best bang for buck is . www.reitoolbox.com ***
6) Am I missing anything else regarding the L/O? I want to protect myself as much as possible. If there is anything else anybody here can suggest, I would greatly appreciate it. Thanks very much for your replies.
*** You want to use a performance mortage to protect your interest. A memoradum of option can also be used Search for those keywords to find more information ***
7) Yes you will get taxed for the option money you receive it depends when. You should have a CPA answer that question for you.
I suggest you have an attorney review everything before the tenant/buyer signs.
Best Regards,
Bginvestor
Great! Thanks for the thorough reply. I appreciate it very much.
Regards,
-Leo
Still confused with setting the future set sales price. Some say set it at the high end of Current FMV, some say base it on the comps on appreciation in the past 2-4 years? The appreciation rates in my particular area range from anywhere in between 10-33%/yr over the past two years give or take. I want to take as much advantage as possible with a future set sales price but don't want to scare any prospective T/Bs away with the price. Any suggestions? TIA.
I would suggest pricing higher than FMV today, but lower than FMV when the option is up. This makes it attractive for the T/B to exercise their option, and also lets you get some of the future appreciation out of the deal. I would try to structure it so that their future mortgage payment would be the same or only slightly more than their rent payment. This makes the option even more attractive to the T/B in that their payments wouldn't rise significantly if they exercised their option. I would not, however, significantly lower the purchase price to keep the payment lower. Let us know how it goes!
iglooman
[addsig]
Hey Leo_Investor,
One point...
Assuming that your plan is to make a bunch of money while creating a qualified buyer for your property, here's a suggestion:
Charge $50 or $100 extra per month for a rent credit option, but the credit should be double the amount of the overpayment as an incentive to pay it. It is very important that you document these 'overpayments', away from the rent. The way to do that is to have your TB write 2 checks each month. If he is paying $1650 for a $100/mo credit, the checks should be for $1550 and $100. Lenders will not take your word for it about the down payment. You must prove that it is and has always been seperate.
hope this helps,
clear2close
[addsig]
I appreciate the replies.
I like the idea of doubling the overpayment as incentive. I may use that.
Another question:
Is a security deposit still applicable even when a large non-refundable option money is collected at signing? With first month's rent, option money, and a security deposit, move-in costs look like they'll scare the T/B away. Opinions?
...nah.
I wouldn't go that far...
[addsig]