How to do Lease option - by Example
Here is an example of lease option or rent to own (lease purchase):
You have a home with 3 bedrooms and 2.5 baths in very good condition. It is worth $200,000. Your loan balance is $170,000 or whatever. The monthly PITI payment is $1290. The monthly rental for the similar houses in the same neighborhood is $1500/month or a little bit higher.
You market your house as lease option like this:
$210,000 - Sale price at the end of 12 month-lease
$10,500 - Option money or non-refundable deposit will be credited towards purchase price.
$1500 – monthly rental payment to you.
Your buyer's offer is like this:
$205,000 - Sale price at the end of 12 month-lease
$8,000- Option money or non-refundable deposit will be credited towards purchase price.
$1400 – monthly rental payment to you.
You check the information provided by buyer's application form and know that the buyer has enough income to qualify for a home at this price range, but the current credit scores for this buyer is not good. But, you think if the buyer pays you on time each month for the rent, you can help the buyer to improve the credit scores so at the end of 12 months the buyer will be able to get a loan for the house.
You believe that this is a good offer and accept the offer after your homework and checking-up. Then, what you need to do is to ask the buyer to sign two agreements with you – a lease agreement and a purchase agreement. Of cause, if you don't think it isn't a good deal, you can counter back.
Here are your results:
$8,000 cash in your bank account.
$100 monthly positive cash flow.
If the buyer is not going to buy the house at the end of 12 months, you get the $8,000 or what ever you agreed option money, and the positive cash flow for the rental.
Is it a much better deal than lease only? You bet. Even if you get a much lower down payment than $8,000, it may still better than lease only.
If the buyer closes the deal at the end of 12 months, you get what you wanted.
Cautions to you:
Never try to do lease option without a real estate attorney. Always have the buyer to go to your attorney's office to sign the agreements.
By Diane Tuman
- Last edited October 12 2012
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