Lease Option and Rent to Own Homes: Questions
Question:
I thought that I found a buyer for a property that a seller has agreed to let me lease option, however when the buyer found out that the option fee of $7,500 is non-refundable and must be paid up-front she said she would not feel comfortable with this kind of an arrangement. The monthly rent is $1,750 so the seller would want 1st month and a security deposit for the same amount as the rent, or $3,500. That means, therefore, that a tenant-buyer would need to put down $11k on a property that they might not even end up purchasing! Not many people have this much money to put down, especially for a property that there is no guarantee they will purchase. Can you please provide me with suggestions on how to make this more appealing for potential buyers? How about having them pay a smaller option fee up-front and then the balance in installments over an agreed period of time? Would this make sense?
Answer:
If the buyer is not willing to put down non-refundable option fee they are not the right buyer. They are a renter. If they are serious about buying and owning that home, they would be willing to put down an option fee (assuming they have it). Maybe 11k is too much for your area and they do not have it. A good range for a rent to own buyer is between 2-5% of the lease option price of the home. If it is $200,000 then $4,000 - $10,000 would be the range.
Sure you can make payment arrangements to have them pay some of the option fee over time. Anytime you are doing a lease option, you will want ot make sure they end up with at least 3.5% down plus closing costs by the end of the opton period. This way they can get their mortgage without having to come upwith more money (which they might not have). Make sure your ad to attact a lease option buyer contains the option fee you are asking for. It will help weed out those that are not serious.
Question:
On a separate note, I spoke to another seller who would consider a lease option but they want $3k in rent of which $700 would be considered rent credits. I am concerned about the rent amount being so high because I feel it'll be difficult to find potential buyers that would be willing to pay that amount each month. The sale price of the house is $480k. They also mentioned that they would want a $10k deposit at closing so I told him that we would require that this be paid up-front to us instead, and that it would be deducted from the sale price. I told him I would send a proposal today so can you please offer suggestions on how you would structure this deal?
Answer:
I agree that if the rent is too high for a rent to own buyer, then you will not get any bites or calls on your ad. One way to check is to test your ad in your market. See if you get any responses, but of course try $2995 vs $3000. It sounds a little lower, but still is about the same for the seller. See if you get bites. If not, talk to the seller about your concerns and test ad. Also, why do they want so much? Is there payment that high? I assume so. Do they have equity in the property where they can give the $700 per month credit to the buyer?
Is the seller ok with you receiving the 10k up front? I don't think that 10k is too much for a home that is almost 1/2 a million. Maybe you can get 20k down and split it with the seller. Will that work for you and them?
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