Posted by MichaelR (NoVA) on December 18, 1998 at 17:42:53:
In a typical L/O scenario the option money is not refundable, so there is no need to keep it escrowed anywhere. The cash is yours for the taking, and not taxable until the option is exercised.
As far as rent credits go, keeping a portion seperate each month could imply that the tenant is building up an equitable interest in the property. This is not the way you want to go, as it can cause trouble later on if the tenant breaks his lease, and decides to claim that it was really a sale instead of a lease/option.
Instead, you will want to apply the credit to the purchase price if, and only if, they exercise their option to purchase. If they don’t exercise, that credit is “non-existant” and belongs to you.
Bill Bronchick has a terrific course on Lease Options sold through this site which I highly recommend. It will answer any questions you have about the methodology and/or legality of L/O deals. Additionally, he has a L/O contract at this web site which you may want to look over.
Whatever you do, make sure you CYA when it comes to the contract. You don’t want a potentially profitable deal to come back and bite you later. Saving money in this area is only asking for trouble.