In a lease option, should the purchase price be fixed now or set by an appraisal at the end

Fixed, every time, and the reason has nothing to do with the market. An appraisal at the end means a negotiation at the end, and a negotiation at the end with someone who has $12,000 of credits riding on it is how you get a dispute instead of a closing. Anyone who has run a service business for a few years knows the terms you leave open are the terms you end up arguing about.

Doesn't the appraisal version also mean the tenant-buyer can't really tell whether they're saving enough? If the number could be $270k or $310k they don't know what down payment they're aiming at.

@derekj19 that's the part that pushed me toward fixed too, and I'm nowhere near writing one. The appraisal version seems to hand the whole thing to whoever picks the appraiser, and I have no idea how you'd even agree on that two years in advance.

You are both describing a real problem, and the answer to it is written into decent appraisal-based drafts. Each side names an appraiser from a defined pool, and if the two values are more than some percentage apart the two appraisers pick a third. That is ordinary commercial language and it works fine. It costs $1,200 and three weeks. The vote here is fixed with an escalator anyway, for a reason nobody has said yet. The escalator lets you price the option honestly. A flat $285k for 24 months means you are guessing once, at signing, about a two year move. A $272k strike that steps 3% a year means you have said what you think growth is and the tenant-buyer can see it. If they disagree they will tell you, and that argument is more useful than the one about whether $285k is fair.

One thing that pushed me: a loan officer I've been shadowing said appraisal-based contract prices make underwriters ask more questions, because the sale price on the purchase contract has to be a number by the time the file goes through. Not impossible, just more friction, and requirements vary by lender and product so anybody planning on it should ask their lender in writing before signing. Friction two years out lands on a tenant-buyer who has no slack.

Fixed with an escalator, plus a clause everyone skips. Say in the option what happens if the appraisal at exercise comes in below the strike. Silence there means the tenant buyer either brings cash to bridge the gap or walks and forfeits, and both of those outcomes were foreseeable on day one. You can write a right to renegotiate, a right to extend at a defined price, or an explicit statement that the strike stands regardless. Any of the three is better than nothing. Whether a court reads a bare option the way you expect depends on state law, which is another reason to write the answer down instead of leaving it to inference.

Appraisal with a floor, and this is the unpopular position. A common pattern in a soft stretch is an owner who writes a fixed strike and then spends the last six months of the term negotiating down anyway, because a walk-away costs them a vacancy and a re-list. So the fixed price was never fixed. It was the owner's opening number with extra steps. If it is going to be renegotiated, agree the mechanism up front and put a floor at your basis plus costs.

@angela_burke that's the first thing in this thread that changed my mind about anything. Six months of research and I'd absorbed "fixed is cleaner" without asking whether fixed survives contact with a market that moves. Still voting fixed with an escalator because I want a number I can underwrite, but I'm writing down your point about the owner's walk-away cost.