Advice on Leasing Condo with Option to Buy

[hogan00]

Hi everyone

I`m looking for some advice with respect to leasing my condo with an option to buy. My condo is located in Victoria BC and I plan on moving out of town next July. With the condo market being somewhat soft I am reluctant to sell.

Has anyone had any experience with this type of sell structure?

I assume the two parties agree on a sale option price at the end of 5 to 6 years with appropriate lease payments, a portion of which would be applied to the subsequent purchase of the condo.

Any advice would be appreciated.

Thanks in advance.

 

[hazed]

I think this is a great way to sell your condo! You set the price now that you will be happy with, or depending on the company, you may opt to do a market evaluation at the time of sale. The lease terms vary as well, from 1 year to 6 years so build in some inflation and the cost of carrying the financing. You usually receive an option deposit and monthly lease payments, and the percentage that goes towards the purchase or down payment can vary as well. But when working together with someone that is able to do this for you, it can be very beneficial for all involved. Negotiate what works for you, and move on, knowing that someone who wants to purchase your condo is living in it and paying monthly lease payments until they are ready to purchase. Good luck!

 

[Thomas Beyer]

QUOTE (hogan00 @ Dec 27 2008, 02:17 PM) Hi everyone

I`m looking for some advice with respect to leasing my condo with an option to buy. My condo is located in Victoria BC and I plan on moving out of town next July. With the condo market being somewhat soft I am reluctant to sell.

Has anyone had any experience with this type of sell structure?

I assume the two parties agree on a sale option price at the end of 5 to 6 years with appropriate lease payments, a portion of which would be applied to the subsequent purchase of the condo.

Any advice would be appreciated.

Thanks in advance.
one issue is the likelihood of option buyer to default i.e. not pay the monthly payment. Most people with good credit and money would not do an option to buy, they buy directly with a new mortgage.. thus you`ll get people with cash and poor credit, such as recent immigrants .. which works well if well screened .. assure that option contract is well written (get legal advice or look on REIN website in "expert" section"), that the $ deposit that is non-refundable covers you for 4-6 month of vacancy and costs to repair the place and that you also have a rental agreement in place so you can evict them if they don`t pay. Thus you have to have TWO (!!!) iron clad contracts: rental contract and option-to-buy contract.

 

[RedlineBrett]

QUOTE (thomasbeyer2000 @ Dec 27 2008, 04:51 PM) one issue is the likelihood of option buyer to default i.e. not pay the monthly payment. Most people with good credit and money would not do an option to buy, they buy directly with a new mortgage.. thus you`ll get people with cash and poor credit, such as recent immigrants .. which works well if well screened .. assure that option contract is well written (get legal advice or look on REIN website in "expert" section"), that the $ deposit that is non-refundable covers you for 4-6 month of vacancy and costs to repair the place and that you also have a rental agreement in place so you can evict them if they don`t pay. Thus you have to have 2 iron clad contract: rental contract and option-to-buy contract.

Thomas has the most important items covered here, but I`ll add a bit to it.

What you need to do is have a fair way of evaluating the future sale price. It basically has to be at or very near market value or lenders will not do the deal. For example: if you say the price in 5 years will be set on an average appreciation rate of 5%/yr... and it turns out that in five years that number is 50k too high no bank will lend to it and your tenant/buyer will not be able to close.

Sooo... what we did is say "look, we need to make at least this amount to do this deal. This was our purchase price plus our required profit. So the option can be exercised by the T/B at any time as long as the price is at least a minimum $ that you set. This gives the T/B an element of control as they can choose to become owners at any time within the term.

Then, we said that the sale price above that minimum amount will be evaluated by market value at that time. If we can`t mutually agree on this price then we do it this way: One appraisal by them, one by us and take the average. If the appraisals differ by more than 5% we agree on a third appraisal and take that number as final.

And make sure you have a good deposit! This is the most important thing to a successful lease/option IMO. Make it big enough that they will not want to walk away, and that they will want to find a way to pay you every month so that they don`t breach the tenancy agreement and forfeit the deposit!

 

[Dan_Eisenhauer]

One important part of RTO is that the monthly build up of equity needs to be greater than the market rents in your town, otherwise CMHC and the banks will not accept the premium as being a true premium.

For example, if the market rate is $1,000 per month, and you establish the premium at $100, but say $300 will apply to the purchase price down the road, the banks will allow only the $100 as equity build up. In order to have $300 apply to the PP, that amount must be over and above market rent.

Another point: In effect, you are loaning the tenant the amount of cash you invested when you purchased the property. You are entitled to a return on that investment. Pick an acceptable interest rate and add that to your rent.

There are numerous posts on RTO here. Do a search for more info.