Maybe… - Posted by B.L.Renfrow
Posted by B.L.Renfrow on April 27, 2000 at 08:43:01:
Dave T has given you some excellent advice below.
You didn’t say how long you have owned the property, but I am assuming your loan balance is pretty close to the $86,600. Have you checked comps to arrive at the actual FMV? Remember, because you are offering the property with terms (the lease-option) you can set your price a bit ABOVE FMV.
Also, I agree that for this price range, $3k is too little option money for a two year term. I’d only go with a renewable one year agreement, with additional option money if the T/Ber elects to renew.
Finally, what will your market support for rent? As with the purchase price, your incoming rent payment should be a little above market. If they can’t afford above $825, then I’d bag the rent credit. As a general rule of thumb, I like to see a MINIMUM positive cash flow of $100 per month on my L/Os - ideally, greater.
Here’s what you might do:
If FMV is $92k, set the T/Bers purchase price at $95k on a one year L/O. Assume the same $3k option consideration (BUT…with ADDITIONAL option consideration if they renew in a year). If the market will support a monthly rent of only $800-825, or if that’s all the T/Ber can afford, then NO rent credit. If they are stuck on the 10% credit, raise the rent to maintain your cash flow.
So if they exercise in a year under this scenario, you’d receive a sale price of $95k, minus $86k loan payoff (approx), leaving a back end profit of $9k. In addition, you’d have the $3k option consideration, plus cash flow of $756 ($63 X 12) using your figures…for a total profit of almost $13k, less any closing costs you’d have to pay.