Tenant proposes a deal that shortchanges owner

Q. I own a townhouse, which I am still paying a mortgage on. I lease the home with a monthly rent that covers the mortgage, insurance, taxes and repairs, with little to no profit. The current tenant is interested in doing a rent-to-own option. They have stated they are interested in this option only if 100 percent of the monthly payment went toward the purchase price after paying a lump sum for a down payment. (My guess is that there is some room for negotiating here.)

I am interested in selling as I live out of state and maintaining the property has become more difficult. How do I determine a purchase price that's reasonable, and how do I consider what is a reasonable percentage of the monthly payments to go toward the purchase price? I am not motivated about making a monthly profit as long as I can cover expenses; however, I am concerned about losing money overall on the sale of the house. How do I calculate the numbers to determine overall gain and loss in this deal?

A. Let's assume your tenants made an earnest money deposit of $10,000. What they suggest means that except for that upfront lump sum, they wouldn't pay any more every month than they are now, and they'd eventually own the property. I don't see any profit for you in that at all, quite the opposite. They keep paying rent, you use just about all of it to pay the bills, and eventually you sign the place over to them. There's no gain in that - only a huge loss. All you'd get for the place would be $10,000. Or if that deposit was supposed to go toward the purchase price, you'd end up giving them the property for nothing.

The usual arrangement for a rent-to-own is that tenants pay normal rent and then add something more each month to be held separately in escrow, accumulating toward an agreed-upon purchase price. The contract states whether or not that would be returned if they ended up not buying. The upfront deposit is not usually refundable, though any arrangement that suits both parties can be written into the contract.

I assume you know your tenants meet their obligations, but, even so, you'd want a satisfactory credit report before you got the house tied up in an agreement. But if their credit is good, why don't they just buy right now?

To set a fair sale price, you need research into what similar nearby units have sold for recently. For that, you should consult a couple of experienced brokers who are active in that area. As you are considering selling, their opinions are usually free and at no obligation.

You mention a "rent-to-own option," but rent-to-own and lease-option are two different legal arrangements. You'd need input from your own attorney or a lawyer who specialized in real estate. An experienced real estate broker could help you negotiate. As a landlord, you should be using a CPA, and that might also be a good person to consult.

Seek professional help. You'll end up in trouble if you try to handle this on your own, or with just advice from a newspaper columnist.

Q. I purchased a foreclosed condo for all cash, borrowing from my line of credit on my own home. Myself, my wife, and my daughter are all on the deed. I would like to now obtain a quitclaim deed and transfer the title to my daughter and son-in-law. They have been making the payments on my line of credit since the closing. The current balance is $71,000, but the value is worth almost double that amount.

Would my daughter and husband need 20 percent down to obtain their own mortgage? If so, could I give them that money to obtain new mortgage and then get reimbursed back at closing for everything? Approximately how much would they need to finance to pay off all closing costs?

A. Assuming your kids are borrowing $71,000, that's only half the value of the condo so they'll be considered as having 50 percent equity. That's even better than 20 percent down. They shouldn't have any trouble, assuming they have good credit, not too many other debts and dependable income. I can't tell you what their closing costs might amount to, but a mortgage broker could. So can lenders.

You're a little hazy on that quitclaim deed, but you can follow normal closing procedures in your area. A gift tax return may be necessary, but there probably won't be any federal tax due.

• Edith Lank will respond to questions sent to her at 240 Hemingway Drive, Rochester, N.Y. 14620 (include a stamped return envelope), or readers may email her through askedith.com.

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