Posted by randyOH on August 02, 2003 at 11:31:06:
I have only been doing these things about two years and I have some of the same questions you have. But I will make some comments for what it is worth.
1)Do you give a set % of the monthly rent as a credit toward purchase price in addition to the upfront option consideration? I was thinking 5-10%.
>>I have been using about 10%. It makes sense to credit the amount that exceeds the normal rental rate.
2)What is the dollar amount for ongoing repairs, if any, that the tenant is required to pay? An example being if the HVAC dies and it needs to be replaced ($2,500), is that the tenant buyer’s sole responsibility? How do you account for major expenses such as this in the event the option is exercised? Say you have had $10,000 in expenses that were unforseen but the tenant buyer is only responsible for $2,500 per the agreement, are you simply out $7,500? Of course you could file a claim for some things but you still have a deductable to pay, etc.
>>Tough one. I have not completely figured this one out yet either. So far, all my lease contracts say the tenant is responsible for all repairs and maintenance. But, the option contract says that any money I have to spend on the place is added to the option price. I have not had any problems with this so far.
- What if the home is destroyed prior to the option being exercised? Do you account for a major fire in your agreements? What option should I have in this instance if the home becomes unusable?
>>My contracts do not address this issue at all. Of course, I have insurance on the property. As a practical matter, I would think you would just give them back their option money and they would be on their way.
- What if the option price selected ends up being more than the appraised value, if and when the option is exercised?
>>I have not had an option exercised yet, but I have thought about this problem. My thinking is that, if the appraisal is reasonable, I would probably go ahead and sell it for that amount. If I tought the appraisal was too low, I would insist on another appraisal and I might stick to the option price.
- In your experience what % of tenant buyers actually purchase the home at the end of the day?
>>As I said, none of mine have actually cashed out yet. I have had two walk away without asking for any money back. One paid their rent right up to the day they left. The other one stayed over about a month without paying any rent. Both places were fairly dirty with a good bit of trash that had to be removed. My impression from reading this board is about 1 in 4 actually exercise the option.
My proposed numbers look like this:
Current value $82K
Current Rent $650/month
2 year L/O for $95K with at least $2,500 down and rent of $750/month with 10% monthly credit. Tenant Buyer responsible for all repairs up to $2,500 per year.
>>Your numbers look fairly reasonable to me. The price and rent seem to be a little out of balance. The rent should be fairly close to 1% of the price. But you have to go with the market in your area. I might give them a $100 rent credit if I had any trouble finding a t/b.