Posted by Buck on July 20, 2002 at 16:01:06:
I don’t know if you are in that situation or just anticipating it. In the lease option program, you are looking for tenants interested in buying the home. Before moving in, they will pay a large fee, possible $2000-$4000, that is a non-refundable fee for the option to buy the property within a certain time period at a fixed price. i.e. Johnny Buyer wants to buy my home. He pays a non-refundable option fee of $4000 to secure an option to buy the home within 24 months for $75,000. During that two years, he will pay me rent of $500 per month AND an option fee of $200/month which will be added to the $4000 as a down payment towards the purchase of the house. If I am selling the house to Mr. Buyer at or just above the market or appraised value, then in two years, Mr Buyer will have paid $8,800 towards his down payment IF and ONLY IF he buys the property. At the end of the lease, he will have accumulated approximately 12% of the price of the house. Now he only needs a mortgage for $66,200 to buy the house. His payments will go down and he will own the house.
If he decides not to buy and just wants to rent without the option, I would refuse to renew the lease and find someone who wants to buy. This time the market value of the house will probably be higher, say $80,000 and I would find a tenant/buyer that would pay $4000-6000 for the option and give them 12-24 months to find financing and possibly an option for an additional year if they need it. Of course, that would depend on my terms of owning the building. If I were in a lease with the original seller, I would have to adjust my time-frame to match the terms of my lease.
The reason to not renew is strictly business. This is a business and you will have some kind of business plan for what you are doing. The two reasons for a lease option are 1: Sell the property and get the profits, and 2: house a would-be home owner, not a “rentor”. Home owners take care of the propert and respect it. You may find a renter that does, but from my observations, many times the best caring tenant turns on you when they are ready to leave.
Going back to Mr. Buyer and his loan. If Mr. Buyer is still employed at the end of the lease, and has made all his payments, then you would be able to owner-finance Mr. Buyer with a mortgage and sell the “paper” to a discount buyer. A worst case scenerio would be to write him a first mortgage for $56,000(70% LTV @ $80,000) at say 12% and a second mortgage for $10,200 at 12%. You can easily sell the first mortgage for say, $54,000,pay off any mortgage left on the house from your purchase pocketting the difference and then have a check for $268/month for the next 24 months. That’s a car payment.
so it’s a small car…
Of course if you have a desire to be a landlord, you might consider borrowing the money to refinance the house and then continue renting it to the occupant.
Nothing but your pocket book will tell you you can’t change your mind by the end of the lease.