Lease options – increasing sale price for long option period

Hi there,

I have just put a Lease with Option together last week and its funny you ask if 5 years is ok, as the Option I have just completed was a 5 year Lease Option.

Generally I would aim for a 2-3 year Option period although I find up to 5 years is still quite ok.

As for setting up a lease Option with the purchase price increasing with the Option period you will find that this is quite achievable and could be completed in a number of ways.

JBC,

That all sounds good in theory, however the real world I would see that you have a few problems with what you are proposing and I will poke holes in your thought process.

Firstly, to mark out a property by 25% over its retail price point for three-year option is way too ambitious from my experience and I have seen people end up in court having to reimburse the buyers for selling properties way over the market. Case in point, I heard through the traps that a guy and his brother who had a property in Regents Park on sold a property through a lease option that was worth $400,000 for $500,000 and it was rumoured that they did an out-of-court settlement for I think $60,000 as a buyer to come to court for unconscionable conduct.

Secondly, as you have stated, the property is a low growth area, from my experience, the likelihood that 3 years that the person would be able to refinance out of the deal would be unlikely because it would not bank value up and therefore you might end up in court again based on the premise that the property deal was set to the failure in the 1st place and that the buyer never had a chance to purchase is property in the 1st place due to an over inflated price point setup at the start and by the general public opinion or if you are totally caught you be viewed as a scammer. There too many consumer action groups these days that would love to hang you out to dry based on the deal scenario that you are proposing. Also, in most cases you look at making money unless the person refinance is you out and therefore the likelihood of a person they do that is near non-existent based on the scenario that you propose.

Thirdly, most people selling of these types of deals go in charging a premium price for a property is 5% – 10% from my experience. You need to purchase a property at a discount so that in the deal if you want to make say 20% margin then you need to purchase the property at 10% – 15% below the market and then charge 5% to 10% over the market. That is how we use to run in when we did about 50 instalment contracts and rent buys back 10 years ago, however the difference was we would only on-sell the property for the maximum listed price in an area for the property specifications that will selling.

Fourthly, from my experience finding people who have a 20% deposit is yellow be extremely difficult for the following reasons. Most people live anywhere between $5,000-$10,000 to their name and if they have any more they will not really want to part with it and if the deal goes sour you don’t have to pay them back a large portion of their deposit/option fee. That hasn’t happened to me but it has happened to a lot of people who have taken quite large deposits in the lease option game. One thing you are forgetting, the person has a 20% deposit, they will go get a loan from a bank or worst-case scenario from the second-tier lender like the Liberty or Bluestone purchase ANY (not yours) property at fair market value.

Your deal seems to be very one sided (all about you and what you want to get) and you really haven’t asked yourself what makes you deal appealing for a buyer to say yes to.

It may seem a bit confronting one of said I’m just trying to help you. There is food for thought in relation to what you’re proposing, I hope it helps.

Kind regards,

Jason Moore

Hi JBC

Knowing Jason personally and knowing how long he’s been in the industry I’d suggest you take his advice to heart ;-)

Back in 2003 when we started in Vendor Finance (VF), marking up a property by 20% over market price was the standard. How things have changed! Our standard way of pricing a VF sale these days is to do an auto-valuation on RP Data. The valuation then comes up with a low estimate, a high estimate and a mid point they call the estimated price. We now use the high estimate as our VF sell price. It’s a price we believe the various courts and tribunals you can end up in, won’t see as excessive. Don’t forget these institutions are ‘all about’ the consumer, as a purchase like this is possibly the biggest purchase your consumer may ever make.

On another issue, we are now keeping away from Lease/Options (Rent To Buy’s) big time. Being a member of the FBAA’s (Finance Brokers Association of Australia), Vendor Finance Steering Committee, I am seeing just how various regulatory authorities (Fair Trading Dept’s), consumer groups and other important stake holders have really taken aim at residential Lease/Options. For example, have a read of the following article showing how the Financial Ombudsman Service are now involved in the over-sight of Lease/Options. CLICK HERE for the article. A recent VCAT ruling in Vic regarding a L/O cost the VF’er $45,000 and these types of rulings aren’t isolated (see the cases in WA).

As vendor finance Instalment Contracts are regulated by the NCCP and seem to be quite acceptable to ‘the authorities’ we’re sticking with them. With this major push against L/O’s we have now given them away in our VF business. Your call of course.

Cheers, Paul

Hi JBC,

If it helps I posted a contract length calculator here.

It relies on some broad and slightly outdated assumptions but it will show how critical growth is to contract length and to your margin. The ebook on that page has a whole chapter on contract length that deals with the optimistic assumptions your buyer will be making in relation to LMI, LVR, whether to ask for a carry back in advance, location restrictions, renovations, and the often promised and never delivered lump sum payments that your buyer might be expecting to make during their contract period.

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Cheers,

Phil