Lease Option

Fellas in real estate and sharps about the market.

Found a house that the people need to get out of by rent,lease option,or sale.

Dont want to buy right now with the market but want to get in the house and do a few decent size improvements(kitchen,etc) but dont want to do it if Im just renting.

So want to propose a lease option to the guy. Any of you done one and what would be the best way to protect myself. I realize the contract would be on what ever price we negotiate today. So if the market drops my option blows. So im thinking the best would be to try to extend the lease option out as long as possible.

Joey,Da woof, Ftness(or whatever the hell your name is) or anyone any thoughts?

you don't have to do an option at today's price. If you think the market is going to drop, you wouldn't want to set the price now. You can do a lot of things.

1 - you can get a right of first refusal instead of an option. Typically an RFR is triggered when the seller receives an offer that they are willing to accept, you would then have say 10 days to match the terms and the deal is yours. With an RFR you are kind of stuck if the seller never decides to sell.

2 - you can get an RFR WITH an option to purchase. The RFR is triggered if the seller wants to sell (same as above), but the option is within your control and could be exercised whenever you want. Thus, you aren't at the seller's mercy waiting for them to sell. You can either fix the price now or you can do a fair market value option to be determined when you exercise. Tough to say which would work better for you, depends if you think market will increase or decrease. Typically the procedure would be (i) you exercise; (ii) buyer and seller try to come to terms on price, if they do, that is the price, if not, each selects a price at which they would buy/seller; (iii) if they can't come to terms on price, each selects an appraiser (often with a floor of your price and a cap of his price submitted under (ii)) to figure out price (there can be a lot of detail that goes into this and different scenarios to determine FMV, if you want I can go into them; (iv) price is set and you close.

Few additional things.

If you decide to go with future value option price and you plan to do improvements to the property you will want to make sure the future value price doesn't include the improvements you do (or you get credit for them through a price adjustment). Otherwise you will pay for them twice.

One of the most important things is to record a memorandum of RFR/option in the county records to preserve your interest in the property. This puts the public on notice of your rights and the seller can't sell or finance the property out from under you. If he were to try to sell or finance it would come up on a title report and they would have to deal with you before selling/financing.

That is basics, but there is more to it once you figure out terms.