How To Handle Future Value Of Property In L/O
I want to lease/option a property I own in Palm Springs.
The market here has been going crazy - prices went up 30% in the desert last year on average.
How can I set a fair purchase price on my lease option, given the crazy market? Should it somehow be based on appraised value at x point in the future? Mutually agreed upon appraiser?
Any ideas? Any legal language for me?
Thanks.
You can do a L/O with the sell price set by an independent mutually agreed upon appraiser. At their own expense, either the buyer or the seller can have an additional mutually agreed upon appraisal. Then the sales price shall be set as the average of the two appraisals.
So that is the sales price. But what if the mortgage companies appraiser comes in lower??
Brenda
davev,
One thing you didn't mention is how long the lease option will be. Have you decided on this?
Dave
[addsig]
Hello,
Here's how I'd do it provided that the market has been going up 30%/year for a few years.
Year one: 30% + current price of property.
Year two: that above, combined price + another 30%.
Year three: that above, combined price + 30%. You get paid off at the end of year three.
Hopefully you've been also collection monthy $ over and above your monthly costs.
Also, don't forget about that upfront money!
Thanks,
OTW :-D
I understand that this property is in CA where this word doesn't usually apply, but let's try to put some realism into this equation here.
I don't buy in CA and don't know the market, but common sense would say that it's very likely that the market will not continue to see a 30% increase in value every year for the next 3-4 years. So trying to price your L/O at double it's current value is probably not the best course of action, since your end purchase price will likely be higher than the FMV at that point.
Most people interested in L/O's have a vague knowledge of current FMV, but understand that they may have to pay a bit more for the priviledge of "buying" on L/O, so pricing a house for $325K that the current FMV is $300K is okay. It will be much harder to move a L/O with a price of $600K for a $300K house.
There are pluses and minuses to selling, and buying on L/O's, and to be successful at it, you'll have to live with them and not try to capitalize at every point.
Benefits of selling on L/O: you sell your house fast, usually at full FMV or slightly above. You get a monthly payment, hopefully for more than you're buying, thus creating positive cashflow. You get a tenant that will take good care of the property often make the house even better it was when they moved in.
The benefits of buying on L/O (and thus, negative to selling): you get a house that you normally wouldn't, or couldn't, qualify for conventionally. Hopefully, you get a payment plan that has "rent credit" in them for more than you would normally pay on principle in a conventional loan. You get the benefit of any added appreciation over the amount that you optioned the property .
Roger
Every one has their own ideas about how to configure a L/O deal. Here in TX I'm sure it's easier to figure a FMV in the future than in CA.
That being said, here are my ideas.
If I am doing a L/O, I want my money up front, so, I ask for a 10% 'non-refundable option consideration fee' up front. I market the house based on how long I plan to lease the house.
If it's a 3 year option, I'll go for 110% of current FMV. If 5-7 years, I'll go 115% of current FMV.
I also base their monthly payment on 12% interest or more.Some people like to use a lower interst rate but I want the tenant to get out of the L/O and into ownership asap. If iterest rates go up (as we all know they will) getting someone to take their option earlier may prove difficult.
Grimmy