WE are considering offering a lease-purchase on our condo, but I'm not sure how they work. We did have a guy who wanted to set a price, have all his rent go towards the purchase price, and have us sell him the house for his budget (about 50K below market value) after 2 years. Now I know that is NOT how it works.

Sure that is how it works. If, of course, you are dumb enough to let it work that way.

Since a lease purchase carries extra risk for you, you should always get market value (less any required repairs) for the place. Your rent should be above market for the place and ordinarily you would apply a fraction of the rent (usually, just the above-market portion) to the purchase only if the payment was made on time, and not late by even one day.

If you have to evict, the courts may misconstrue your lease purchase arrangement. So protect yourself going in. Construct an ordinary lease, with the higher rent and a deposit listed. The deposit should be a small deposit (maybe $250-$300). Construct a separate document (do NOT make this part of your lease, but make it refer to the lease) that contains the purchase option information.

Charge the tenant/buyer a non-refundable OPTION FEE of 3-5% of the intended purchase price. Your purchase option agreement should read that all of this fee will be applied to purchase if the purchase is made within the option period, otherwise it will be forfeit. You may, at your option, put a renewal clause in the option agreement. Apply a couple hundred of that fee to the deposit, per the lease, to satisfy a possible issue with the courts.

Then rent the place. If the tenant buyer maintains all responsibilities and buys the place, you are done and all is well.

If you have to evict the T/B for non payment, then proceed as in an ordinary rental. Present the ONLY lease to the court. Do NOT present the option agreement. If the tenant shows up with the option agreement, let HIM present it. Usually he won't show up, or won't have it with him, and therefore your eviction is not complicated by the existence of this option.

About the Author: Jim Locker is a technical guy who has done a lot of real estate investing and landlording. The experiences he writes about and advice he gives are either first hand, or in answer to specific questions posed by others. He is commonly known as jiml8 around the internet.