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.
Urgent help needed setting up a L/O - Posted by Russ Sims
Posted by Russ Sims on December 18, 1998 at 12:01:23:
I’m moving and have decided to lease option my current house. In fact the newspaper ad starts today! Is it customary to collect a security deposit, in addition to the option money? And what about the option money… Am I required to keep it in an escrow account? Does the same hold true for accumulated rent money that is applied to purchase?
I know that these are real basic questions that will be answered when I purchase my L/O course. But until that time I would appreciate your help! Thanks-ever-so-much…
Russ Sims (WA)
Re: Urgent help needed setting up a L/O - Posted by Michael Ryan
Posted by Michael Ryan on December 18, 1998 at 15:16:48:
The rule to apply is an old one - CYA
You can check with the local apartment owners association or the Real Estate Licensing bureau in your state if you are licensed.
If you are part of the regular folk, you have a lot more latitude but just as much liability. I suggest setting up a separate account to help you NOT to spend the money. Your contract will disclose how the money is being treated (mention whether you will forward interest or not). But check with any associations you can.