Welcome!

By registering with us, you'll be able to discuss, share and private message with other members of our community.

SignUp Now!

Rent-To-Own agreement

boaz

0
Registered
Joined
Nov 26, 2010
Messages
64
Hello,
I have a condo where the current tenant is interested in a rent-to-own option (buy in one year).
He has been there over 2 years and has been a good tenant, and I feel that he is reliable.

I am drafting an agreement for the RTO option agreement, and have some questions.
Seeking advice and guidance.

(1) The price: How do I decide the price? Do I use the current market price? Do I add interest on top of fair-market price?

(2) term: 1 year
(3) Sign-up option fee: I am thinking $2k - $3k sign-up fee.
(4) monthly option fee: about $1k monthly
(5) all option fees are non-refundable
(6) cancellation:
  1. The tenant can cancel anytime, but option fees are non-refundable. If I have to cancel, what could be a conventional penalty?
  2. Or, make it a bound contract, so no way out on both parties.
(7) anything else I should include?

All advice and suggestions are very appreciated.

Thank you in advance
 

Matt Crowley

0
REIN Member
Joined
Dec 14, 2013
Messages
980
Hi Boaz,

Good questions.

It is an option meaning that if you don't exercise the option you lose the option. There is no penalty.

You have a tenant in place so all you need is a simple option agreement. Don't need to do anything to the lease.

The sales price is negotiation between you and the tenant. If you are in a hot market, then you can probably justify a price above market. So push to where you think is reasonable and keep in mind that if your price is out of whack financing will not accept that valuation which can create challenges if the tenant has low equity.

For RTO, the goal is to ensure the tenant has the % down payment they need to purchase at the end of the term. So the additional option payments help them build equity (which is partially offset by the higher price they need to pay but not by much).

All option money non-refundable (typically) yes.... but I'd suggest to set up the RTO in such a way as you sell the property to the tenant at a fair price, recognizing some gain the appreciation...but if they are taking all the risk how much of the upside would you say they are entitled to? Make sure you leave enough meat on the bone that it is win-win. You have the math right though, the forced appreciation is effectively the option money that you can keep in your jeans at the end of the day.

(6): it is an option so you need a defined time period. A savvy buyer should register this interest on title so the property isn't sold under them. The option is dead when the time is up. But yes, you are 100% committing to sell them the property for that entire duration of 1 year and not sell it to anyone else.

I had to do a bit of thinking on the derivative side of this as a RTO is different than a conventional call option as the option payments are applied against the strike price (forced appreciation).

S0 = market value $400k
X1 = strike price / forced appreciation 5% = $420k
c1 = option payment by purchaser $15k per above

This means that if the market price is anything above $405k, they would exercise as their option moneys are otherwise lost. If there is a cancellation option, they give up their upside above a number.

X2 = $500k, for example

So the purchaser would be in the money only if the price is below $500k. I think we have to assume option money is refunded in this instance. The payoffs would look as follows:

StPayoff
380,000- 15,000
390,000- 15,000
400,000- 15,000
410,0005,000
420,00015,000
430,00025,000
440,00035,000
450,00045,000
460,00055,000
470,00065,000
480,00075,000
490,00085,000
500,00095,000
 
Last edited:

boaz

0
Registered
Joined
Nov 26, 2010
Messages
64
Thanks a lot for your response.
I really like your suggestion heading to a win-win.

Shamelessly admitting that I am not sure if I understood 100% of your formulas.

Thanks again
 
Top Bottom