Inflation Index For Contract?
It looks like I may be lease optioning the property I am currently finishing up- I wound up sinking a bit too much into it to justify using it as a rental, so I have the choice of selling now, or renting it out for a couple years while hoping for the market to improve for just enough to cover expenses (no cash flow).
I have a party interested in doing a lease option, but unwilling to pay much of an option fee and only willing to pay the lease rent I would be getting anyway. The bright side is that I have the inside scoop on their situation (foreclosure due to medical bills resulting from an accident) and my friend who introduced me says they are very serious about going through with the purchase once their credit recovers. But this is going to take time, so they are looking for a three year lease-option.
The problem to me is that it seems like I am shouldering all the risk- if the value of the property goes up, they will buy it at the option price and I will lose out on the appreciation, but if the value goes down they will just not buy it. Even more of a concern is inflation and rapid devaluation of the dollar.
So I was considering having the option price tied to inflation, going up in step with some index. The question is, what index? Something relating to building material cost would be the most logical, or that includes all inflation (not excluding food and fuel).
What index would you use?
Thanks,
Chris
many use consumer price index (CPI).
Check out the components of the CPI. http://www.bls.gov/CPI/
just picking a number can work too.
I tie the price inflation to the 5-10 year average housing price increase for that zip code. (Usually around 4-7%)
Also, to mitigate your risk on the housing price fluctuation, you can either keep the term shorter than 3 years (I typically do 12 - 18 months,) or you can keep the longer term, but sell the property next year to an investor.