Purchase Price Agreement?
Hi everyone,
I am closing a lease option deal and the owner wants to lock in a 2% increase over the current lock in price every 12 mths. Our lease option agreement will be 3 years. I suggested that we can agree to the 2% increase in price subject to the appraised value of the house after one year. I'm wondering if that is a good idea though? The owner can always find an appraiser willing to hype up the market value of the house, and we will also have our appraiser project a more realistic market value. So who's appraised value is correct then? This will lead to a big debate 12 mths later.
Has anyone dealt with this situation before and how do you resolve this? I hope to hear a response asap as we are meeting the owner to close the deal tomorrow. Thank you for your help in advance.
Thanks for the response. I do think 2% is actually pretty good. Utah do have one of the lowest appreciation value in 2003 (average 1%), but the house is in a great neighborhood so that helps. I just want to be careful that we don't lock ourselves into a 2% increase in value when there's only a 1% or even less appreciation in a year's time.
We definitely can negotiate a 2 yrs appreciation instead but i doubt the owner will budge. Would you or anyone else agree that adding a clause that subjecting to an APV a year later is the best way to go or would there be a better suggestion?
Thank you all!
patojetlim,
Glad to meet you.
After speaking with several investors in your area not only is the appreciation rate poor, in some areas where you are the houses are declining in value.
I would use caution in using a percentage value vs a true value at the end of the term of your lease option.
John $Cash$ Locke
[addsig]
Yeah, if it isn't a good area, then I would be careful. Thanks again John.
Hi John,
Yes, you are right about certain areas declining in value. I highly doubt this area that I am L/O this home will decline in value, but it's definitely better to be prepared.
So I guess i shall add in my clause that the 2% increase will be subject to APV, and subject to the market value not declined by then. If MV depreciate, both parties agree to revalue the purchase price at the current market value, subject to APV too.
Sounds like a good plan?
Thanks John and Miraclehomes for your quick response.
Patojetlim
If its not to late, what about simply doing a equity split.
Or do a hybrid equity split. Split anything above 10k (your pure profit), 50-50, or 80-20, or something like that when your T/B cashes you out.
No need for annual adjustments or reevaluations.
Well I'm in favor of simple agreements. I'd gladly trade his 2% annual price increase for a much lower option payment. If the prices don't keep pace you can always go re-negotiate the deal then (after all you're not required to exercise the option) by keeping the option fee low you make it easier to walk.
The whole appraisal mechanism strikes me as incredibly unwieldy and is mostly about you not having confidence in the deal.
Make a deal where you don't mind walking away, if you get the appreciation then close. If not, renegotiate. If you can't negotiate a better price at the back end then walk.