Home Selling in Shoreline>Question Details

Jill Perry, Home Buyer in Seattle, WA

We are considering selling our home in Seattle as a lease option. (Rent Option?) What amount is reasonable to

Asked by Jill Perry, Seattle, WA Sat May 10, 2008

ask as the Security Deposit or Good Faith Amount towards purchase- then what would be an acceptable rent amount for a 2400 sq. 4 bed 2.5 home in Seattle area.

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8
Jill, you're taking the wrong position in this hedge, so far as I can see, because, as Ardell points out, you're probably not going to get enough money out of the deal to justify the risk.

If the value does go down, your buyer is probably not going to exercise their option. If the value goes up, they get the benefit of appreciation and you get a few coins in extra rent. Meanwhile, as Don points out, they have ample time to trash the place before giving you back the keys.

The whole idea behind sub-prime lending was that you either charged people with bad credit more in fees and interest, and you spread the risk around so that if they defaulted, the pain would get spread around.

What you're proposing is to put your valuable home in the hands of someone who is essentially a sub-prime borrower, with very little upside for you in addition to your taking on essentially all of the risk.

Or, maybe, I'm misunderstanding something here.
1 vote Thank Flag Link Thu Oct 1, 2009
You should probably ask no more than an amount equal to the monthly payment for rent and security deposit in fairness to the buyer. To protect your interest, what do you estimate your potential losses to be should the buyer not follow through? Ask for enough to protect your interests should the buyer back out, and make all or some part of the option money they put down apply toward closing costs if the deal goes through. This is fair to everyone.

There's no limit to how creative you can get when negotiating the terms of option money. Let's say your buyer expects to be able to close on the purchase within three months after taking possession. You could make the entirety of the option money apply toward buyer closing costs if the closing takes place within that time-frame, 80% of the option money apply toward their closing cost if the option period extends to between 90 and 180 days . . . and so on. This is both fair to you and to the buyer, and provides an incentive for the buyer to act expeditiously.
1 vote Thank Flag Link Sun May 11, 2008
Let's assume your house is worth $500,000. The option price might be $5,000 and the monthly might be $1,750 or so. A lot depends on the home's location, the schools, and other factors. But that's a ballpark.

But know that your are renting it and not selling it. More than half of the Lease Purchase contracts don't close, according to some statistics I have read.

1) If the market goes down in the next couple of years, and it may, the buyer will not want to buy it at today's prices, even if they have agreed to do so.

2) The mortgage criteria is not likely to improve to the point where someone who can't get a mortgage today, can get one in six months or a year. So if they can't get a mortgage now, why will they be able to get one later? Know that answer.

If they have a great credit score, but need more of a downpayment, often the monthly amount is increased over market rent, so as to give them a credit against the price or a downpayment buildup.

The bigger question is why would you want to risk selling it next year for less than you can today?
1 vote Thank Flag Link Sun May 11, 2008
Seattle is a big area to establish fair market rent... However $2000 /month might be fair for your home. As a lease/option, typically the renter pays for the option, which fixes the price at what you establish now. The tenant would pay you $5000 - $10,000 for the option, or maybe more (up to 3%). You would charge slightly higher than the market rent, and credit some of this money back to the tenant toward their down payment, if they excersise their option. That's how a lease/purchase is supposed to work...
The problem is, in a down market... If your home looses value, the tenant will not excercise their option to buy without trying to renegotiating the purchase price downward with you. If you have not collected enough money for the option, or on the increased rent, the tenant will walk as soon as they can find and qualify for something more attractive, pricewise. Meanwhile, they will have been treating your home like they owned it (not like good tenants!) and may have torn into the walls and be in the middle of countless DIY projects (I have seen this alot!).
If you choose to rent your house, get a professional rental company! This will insure that your home is rented properly, well maintained, and records are properly kept. No worries for you! Otherwise, get real about the price and get it sold!
0 votes Thank Flag Link Wed Sep 30, 2009
Think this through carefully Jill. How long can you afford to keep this home rented? If it isn't at least 3 years don't do it. Your tenant will likely not buy, regardless of the deposit or rent incentives. Once they are qualified to get a mortgage they will always go back to the market and look again. They always find a better buy. In the meantime, they'll be treating your home like renters do. You'll end up with more expenses to get the home ready to sell again and it will be vacant the whole time, creating possible financial hardship. Trust me. Lease options are only good for the tenants because it allows them to get into nicer homes. Go back to your agent and get a real list price that will sell it now. If you absolutely can't live with that number then you can cast your lot on the stormy seas of rental management. You've heard the stories. Ever heard a good one??
Web Reference: http://www.windermere.com
0 votes Thank Flag Link Mon May 12, 2008
"Our home: Listing starts at 479,000 say a new potential buyer needs to post 90,000 for 20% down and then be able to qualify for residual."

Most people do not have 20% down. Many have only 10% down, if that much. More have only 5% down or less. The seller doesn't raise or lower the down...the lender does. If they can only get a loan with 20% down, then the seller cannot "reduce it to 12%". It isn't at the option of the seller.

"My thought would be - Lower list price to $24,000 down from original price: To 455K
cut the Down the 20% to about 12% to the most serious buyer- and then allow them the 2 years to reorganize credit score."

It's not likely they would pay 12% in advance, even if they had 12% at closing. The full downpayment is not paid to you up front, only the Earnest Money ($5,000 or so) which you do not get to spend, but must hold in escrow until closing.

Numbers wise:

"So I would then apply the approx 50K to Principal of Property and give them a 500.00 a month credit in rent for 2 years. ( 12,000) = 62K "

You would be better off reducing your sale price now to $450,000 (not $455,000) and selling it outright.

"Which then when Seattle Market recovers: The house which I am selling for at 455K Now would have in 2 years dropped to $393,000 Due at that time. After Two Years with the reduction of 28K from start and the down and the rent credit- they would basically have 90K in built in equity of house. At time of Sale completetion. Make sense???"

If they agree to buy it from you for $455,000 and it is only worth $393,000 at the time of closing, it won't close as it won't appraise. Reducing their monthly won't help prove that they can afford to buy it. The monthly is usually higher and not lower than market rent.

The lender at the end will not likely see the reduced rent as amount paid toward the purchase price.

1) Just sell it at current market value
2) If you wish to pursue a lease purchase, consult an attorney, as it appears that you plan to keep 12% of the buyer's money from the beginning, and WA Law does not permit you to keep 12% of a buyer's money under any circumstances. Even if they default, the law has a limit of 5% of the purchase price that can be retained by a seller in the State of Washington. There is a limit of 5% of the sale price that can be forfeited, and it is only forfeited (becomes yours) in the event the buyer defaults.

What you are suggesting is that you take $12,000 as advance rent payments at $500 per month and calling it a portion of the downpayment for loan purposes. That is not likely legal, and it also won't likely work.

I suggest you drop the price to $450,000 or consult an attorney regarding other options.
0 votes Thank Flag Link Sun May 11, 2008
Thank you to you all for information, I did look up and did find similar answers, but here is a curve ball I would like some responses.

Our home: Listing starts at 479,000 say a new potential buyer needs to post 90,000 for 20% down and then be able to qualify for residual.

My thought would be - Lower list price to $24,000 down from original price: To 455K
cut the Down the 20% to about 12% to the most serious buyer- and then allow them the 2 years to reorganize credit score.

Numbers wise:


So I would then apply the approx 50K to Principal of Property and give them a 500.00 a month credit in rent for 2 years. ( 12,000) = 62K

Which then when Seattle Market recovers: The house which I am selling for at 455K Now would have in 2 years dropped to $393,000 Due at that time. After Two Years with the reduction of 28K from start and the down and the rent credit- they would basically have 90K in built in equity of house. At time of Sale completetion.

Make sense???
0 votes Thank Flag Link Sun May 11, 2008
I suggest that the answer to this question must be based on your goals. Why do you want to Lease Option? is it because you want a cash flow or because your home hasn't sold? If you're looking for cashflow, I always require a minimum $5,000 non-refundable Option Fee. You can contact a few property management companies to find what current rents are in your area of Seattle. I charge 8% over going rates, and credit 3% of ON TIME payments to their future downpayment. You may also want to buy a home warranty plan and write your contract to have tenants pay anything less than the service fee in repairs.

If your LO is due to a slow sale, you may want to re-consider. While the market is slower than last year, homes are still selling. Different agents have different levels of experience and will do different things to expose your home to buyers. I'm not in a position to advise you how to deal with your agent, if you have one, just realize there are some things all agents do, and some that very few do to get your home sold. If you're in that position, another agent may help you in different ways that result in a sale.
Web Reference: http://www.ziprealty.com
0 votes Thank Flag Link Sun May 11, 2008
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