Help with possible lease option - Posted by Dan

Posted by Tim Fierro (Tacoma, WA) on June 06, 2003 at 09:15:39:

And have you thought of just keeping the house as a rental instead? You are already thinking of refinancing @ 3.5% for 25 years so the payments are made by the renter and you get the cash flow and keep the house. Something to think about to start your rental portfolio if you want to go that route.

Help with possible lease option - Posted by Dan

Posted by Dan on June 05, 2003 at 20:17:45:

Hello, I would appreciate any help with the following situation:

I am married with three young kids, living in a three bedroom house valued at $80,000. I owe $67,000 on the mortgage, and still have 26 years left to pay on it. I want to move into a larger home, but I don’t want to “break my budget”, so to speak. I want to pay around $100,000 for the larger house, and with my credit, should be able to get a 100% conventional loan with about a 5.5% interest rate.

I am considering lease optioning my current house, instead of selling it. I dont want to pay a realtor, and I dont want to try and sell it on my own either, and it may not be as profitable than if I lease-option the house out. According to my lender, I can refinance my current house to a 3.5% interest, 25 year loan, bringing my payment down from the current $560 a month (PITI) to around $450 a month. I should be able to get $700 a month on a lease-option, giving $100 a month credit towards the down payment, and would ask for $1500-2000 option consideration, and the tenant would be responsible for all maintenace except if the major systems (AC, Furnace, Hot Water, etc) break down, and would set my sales price for $80,000 or higher.

Would you guys do this, instead of flat-out selling my current house, paying the realtor 6% commission, and eating up a good chunk of the $13,000 or so spread I have between what I owe and what I could sell it for? What are the advantages and disadvantages to doing this? What order do I do each of the steps necessary? Do I get an attorney, draw up a lease/option agreement, advertise, find the tenant, give myself 30-60 days or whatever to find another house, and then move out?

Also, whatever house I buy will have to be a “deal”. I wont pay $100,000 for a $100,000 house. I plan on thinking outside the box to find a deal where I can get some immediate equity. I dont have much in savings, so thats something else to keep in mind here.

Thanks for any input or advice in advance!

Re: Help with possible lease option - Posted by B.L.Renfrow

Posted by B.L.Renfrow on June 06, 2003 at 10:37:00:

Your plan sounds like a solid one. That presumes you have already determined you will be able to obtain the new loan with the present loan in place, and that you don’t need any of the cash out from your present residence.

If you are thinking about pursuing lease options as an investing goal, you should obtain one of the courses on the subject available here on this site. However, if this is a one-time deal, you can probably put it together with your attorney’s help and by reading everything here you can find about lease options.

You ask about the advantages and disadvantages of lease optioning your current home. I think you already know the advantages: more rent, higher sales price, better quality tenant/buyer, no need for immediate sale.

As for the disadvantages, you must have a game plan going in as to what you will do when the T/Bers don’t pay. With good screening, hopefully this will not occur, but you need to be prepared. You also need to keep some money in reserve so that if they disappear suddenly, stop paying, or the major systems need repairs you are able to cover those expenses.

Another disadvantage is that someone may actually buy the house! As Tim said below, you may want to think about just keeping it as a rental, although that will probably mean more work on your part.

Don’t forget about taxes also. Since it is your primary residence, if you sell having lived in the home for two of the previous five years immediately prior to the sale, you are not taxed on the profit.

Also, you might be able to get a bit more than $1500-2k as option consideration, although to some extent, that depends upon your market. The usual figure for option consideration is 3-5% of the sale price.

Likewise, if FMV is currently $80k, you should set the option price a bit higher, particularly if real estate is appreciating where you live.

Finally, don’t forget that most – not all, but most – problems can be prevented going in by careful screening of your potential T/Bers. If you’re not sure how to do this, get some help from experienced landlord and ask questions here. And don’t forget to change the insurance over to a NOO policy once you move out.

Brian (NY)