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!