I get quite a few follow-up inquiries from my various posts on lease-to-own type transactions.  Following is one such recent inquiry, along with my responses (via e-mail):

Question: I have some questions that perhaps you can help me with: a) given the condition of today's market, what percentage of appreciation should I apply to determine a future value for purchase by lessee? 2%? 5%? More? Less?      

Carol: We add 10% (for a 2 year lease option) regardless of market conditions.   This is a very conservative 5% per year.   Our investors look at this a little different than you do because they are looking at it from a return-on-investment point of view.  10% down upfront is there initial investment... plus 10% upcharge on the back-end gives them 100% return on their money in two years.  However, for you, the 10% (or 5% per year) may seem too conservative.   I'd say push it as far as you can without losing the buyer.  If the appraisal comes in low at the end of the lease period, reduce your price.    In your case, considering the soft marketing conditions, I would not establish a price and talk a 5% increase per year.  I would set the price and say it is locked for  the 2 year period.  This may be more psychologically acceptable to your buyer.   Also, consider giving them a discount for an early buy-out.  Does that make sense?   

Question:  b) As seller/landlord, what is a reasonable monthly rent to charge above my costs for mortgage, insurance & taxes? I planned on giving a $500 per month rent credit toward purchase on a 2 year option, and charging a 2.5% non-refundable option premium that will also apply toward purchase if option is exercised. After 2 years, house purchase price to increase at 3% until 60th month, at which time, lessee must buy or vacate.

Carol:   What price range home are you talking?  What is market  value for rent?  What is your total monthly obligation on mortgage, taxes, insurance?  More importantly, what would the monthly obligation be if the buyer were to finance outright?  This really is the benchmark from where to structure your payments (not from YOUR obligations).     The problem with giving a high monthly credit back is the buyers have very little incentive to close asap.  On the other hand, if you give a generous credit back, you can charge high market value on the rent.   The credit back also helps them build a down payment, for easier financing at the end.  However, the lenders won't necessarily allow this large credit back IF the rent charged is over market value.  A better way to do it is have them break the payments into two parts (rent + credit back).  Set up a separate savings account for this money. This creates a paper trail of savings for the lender to use at the end.   There are so many options and considerations here because you can really do anything that is agreeable to both parties, but you have to consider lender allowances at the back end.   The program I work is less complicated.  We have established guidelines that are the same for each transaction.  

Question: Is what I am proposing legal? Does it sound do-able? I, like you, am looking for a win-win situation, that's why I want to apply the $500 per month and option premium to purchase.    

Carol: It is totally legal... if done legally.  You can negotiate whatever terms you want with a buyer, but you must work with a competent real estate attorney on the contract.  There are tens of thousands of attorneys and, trust me, not all of them are competent.  And, very few actually specialize in real estate and even fewer know how lease/options should be structured.  Ask around for recommendations on real estate attorneys, then ask about experience with lease options.   If you want some additional ideas on how to find a competent specialist let me know.  I work with a nationwide network of attorneys that do specialize in real estate.

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After receiving my e-mail, this gentleman called and we talked quite a while.  He was very big on giving large monthly credits to help the buyer build the down payment.  I recommended he contact a lender to see what is allowed and how to structure it to work.  The problem with giving BIG rent credits is the bank knows what you are doing.  You are basically giving the buyer their downpayment by rebating their rent money.  This does not create a secure situation for the bank.  Essentially, the buyer is not putting any of their own money into the actual purchase and lenders don't like that.  They want buyers to put in their own money so they think long and hard about walking away from the property if they fall onto hard times. 

If anyone out there has specific questions, send me an e-mail.  I am licensed ONLY in Washington State but I can give some general observations and opinions about L2O's in general.