lease purchase and equity sharing - Posted by Holly

Posted by Holly on July 25, 2003 at 17:00:39:

Thanks for the input. It’s always good to hear how someone else views your ideas.

lease purchase and equity sharing - Posted by Holly

Posted by Holly on July 25, 2003 at 10:09:33:

I’d like to get anyone’s thought who sees any potential problems with the following scenario:
We want to help one of our sons and his partner buy their first house. We are moving out of our house and want to lease/option our house to them with 1/2 of the rent going toward the purchase price each month. We’ve sold a house in Jan 2003 and avoided capital gains since it qualified as our primary residence for 2 out of 5 years. We want to do that on this house so we can’t sell until 2005 (every two years), thus the lease option for two years. At that time, we want to sell to son and partner for below market selling price so they can qualify for financing and have a reasonable payment, but retain 1/3 equity share by keeping us on title so that when they sell the house, we can recapture the equity we’re giving up in order for them to afford the house. Comments or suggestions anyone?

Re: lease purchase and equity sharing - Posted by Ben (Oh)

Posted by Ben (Oh) on July 25, 2003 at 16:00:04:

Holly, I’ve never done this, so please be aware of that. I think some numbers would help, so I’m going to assign some to try to capture how this might work out.
Let’s say your house is worth $100,000.
You set up a lease with option to purchase at the end of the 2 year lease at appraised value minus .67 * (appraised value - $100,000) and rent for $1000 for 2 years. I’m not sure of the point of having rent credit in this case. I use it to force my tenant buyer to pay on time and to keep their option–maybe it makes sense here, but it requires some higher math, especially since you’re paying down to an unknown future purchase price. You could also fix the future price, which would at least help you set the rent credit appropriately. Let’s say you expect the house to be worth $118k in 2 years (that’s a lot of appreciation, but this is just illustrative), then with rent credit totaling $12k in this case ($500*24 months), you can mark up the purchase price to, say, $118k, making the end purchase price $106k and you keep you that 1/3 of the expected appreciation.
Hard to say what the real appreciation will be and when you go to sell it, you can sell it to them at whatever you want–which brings me to the idea that maybe you just want to lease the property conventionally and sell it at the “right” price so you get what you want and your son gets what you want him to have in the end. It’s a much cleaner way to do this, with the drawback being that there’s no contractual document giving the right to purchase at a discount to your son, only your word.
In any case, I’d say that you should set up the lease and provide the option, if you’re going to go that route, in a separate document.
There are probably more elegant legal ways to set this up than what I described with my 0.67 equation above, but I think that is the kind of thing you’re going for.
I also suggest your son and partner get with a good mortgage broker and tell him/her what they should expect to pay and get them on track to close in two years’ time. They can have a look at their income and credit situation so they’ll be ready when the time comes. It’s a bad idea to wait 1.9 years and then get started on the path toward qualification.