Determining L/O Pricing

Shirley profile photo

I have a home under contract that I want to L/O....this will be my first L/O. I have been watching the papers and have not seen one single L/O available for several weeks....ZERO. This market is very hot with properties appreciating consistently in the double digits for at least the last six years. After fix-up, this home will be worth about $260k. I could get at least $1400 per month rent and probably even $1600-1700 rent if I really wanted to. I have read some of the other recommendations on this board about price, but I just find it hard to believe someone would pay 3% option and 1% per month for this home. In this area, rents are typically 1/2% of the purchase price. (ie, a $200k home would probably rent for about $1000 per month). Also, appreciation rates are generally running 12-15% per year. I am thinking about a 2-year L/O.

Three questions: What price would you put on this L/O? With appreciation rates so high, where would you set the buy-price in two years? Do you have any good book recommendations on L/O's?
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Comments(2)

  • lassitermarketing10th March, 2004

    3-5% option money is common. For monthly rent I usually ask 110% of market rents. So if your rent survey says $1500 then ask $1650.

  • lansinginvestor10th March, 2004

    Somethings to remember about L/O tenant buyers, the person that is looking to L/O is usually not able to obtain a standard loan. They are willing to pay more in monthly rent, and a higher option payment to be able to purchase (this is from my own personal experience a few years back when I wanted to L/O) along with responses to my last ad. Lassiters numbers are right on, 3-5% for the option payment and 110% of market rent. As far as the purchase price, build in your annual appreciation, you might want to only add in 10% annually, leave something on the table for your buyers so they should have equity at the end of the 24 months. This is part of your selling plan to the tenant buyer, if appreciation hits 12% per year, they are going to have instant equity at the end of the 24 months, plus their lease option payment should be deducted from the pruchase price, and maybe a monthly rent credit as well. I beleive you should always make it a win-win for both of you, you will have a nice option payment up front, good monthly cash flow, and about 75% of the appreciation value after 24 months. Your tenant buyer gets a nice house, credit towards the purchase price, and the pride of homeownership.

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