How much of an option fee do you recommend on Lease Options?

So, you own a property and you’re considering selling the property on a lease option. Congratulations! In many cases, this is the very best strategy you can use if you’re OK with being an active Nomad or sophisticated real estate investor that is concerned with return on equity.

So, how much of an option fee do I recommend you collect?

The short answer is: as large as you can up to the full amount of equity you have in the property.

Let me address and clarify both parts of that statement.

First, you should try to collect as much option fee as you can from your tenant buyer.

  • The more you collect, the more likely the tenant buyer is to perform by exercising their option and buying the property from you. The smaller the option fee, the less likely they are to buy the property from you.
  • The more you collect, the more security you have in case the tenant buyer damages the property.
  • The more you collect the better your return on investment will be.

If you’re considering buying a property from inside the MLS (that the tenant buyer selects) using me as your broker, and then offering it to them on a lease option, I recommend at least 5% down. The only exception to this is if you would otherwise have bought the property for your own buy and hold portfolio anyway (because you may end up with the property in your portfolio if the tenant buyer does not exercise their option and buy it). The more you get down the better, but I would not recommend even entertaining working with a tenant buyer if they don’t have 5% down.

Second, you should not collect more option fee than the equity in your property. If the option fee gets applied to the purchase price when the tenant buyer exercises their option, you want to make sure that you are not upside down. By upside down I mean that the tenant buyer has more equity in the property than you do because their option fee is larger than the equity you have. This is more than just practical, good business sense advice… this is “keep you out of trouble with the Colorado Division of Securities” advice. Don’t do it. One possible solution is to actually pay down your loan with some of the option fee money to make sure you’re not upside down.

Lease Option FAQs

Option Fee