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How would I determine the lease and purchase amounts of a three year lease/purchase agreement?

The current asking price for a parcel of land is $200,000 and the seller prefers a three year lease arrangemant with the option to sell at the end of the term. What should be the amount of the lease and how much of the lease should be applied to the final purchase price?

Public Comments

1. There are some very important transactions that one does in their lifetime where it pays to spend a little extra money to make sure it's done right. We could consider this kind of expenditure akin to malpractice insurance. Your paragraph reveals that you're on the threshold of (maybe) entering into a very important, costly real estate transaction and you're not sure how it should be structured. And that may give too much opportunity to the seller to do all sorts of things, maybe ethical, maybe not. But if it's a bad deal for you....in the long run...you won't know about it until years later when you feel the lease should convert to ownership. I believe it would be a smart thing on your part to find out as much as you can now about what kind of terms the seller will offer to you, then take that information to a real estate attorney to get some guidance.
2. You are speaking of two separate transactions which may be intertwined - a lease AND an option to purchase. BTW the option to purchase is YOUR option, not the sellers. Try and determine the current fair value of the land by finding recent comparable sales. These are usually available at the municipal or county level. Depending upon your area, the tax assessment may or may not be an indication of value and is certainly worth looking at. Once you have an idea of worth, see if there are any other parcels around that are being land leased and try to find the rate. Commercial brokers are a good source. If this is agricultural property, it is common for some farmers to lease their land for agricultural production. It is not hard to find out the going rate (try the USDA field office in your area). Some land leases apply a rate of return to their estimate of value (e.g. an 8% return on a parcel valued at $200K is $16K per year). Armed with this info, try and get a competitive market rate for lease and an option for today's fair value of the land. Presumably, fixing the purchase price today will make your option more valuable in a couple of years. The seller may require some payment in consideration for your option. Weigh this payment against where you think values will go and insist that the option consideration be credited to the purchase price. By knowing the market for lease and sales, you will be able to separate the respective values and present an offer that will be advantageous to you. Landlord/Sellers play games with fair value of the property, lease payments and rent credits. The more knowledge you have of local market conditions, the more effective a deal you can cut......