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Articles  >>  Understanding Lease-Options

What is a lease option?


A lease option is an arrangement with you and a seller to exercise the option to buy a house after you have rented it for a specific period. A portion of your rent would applied toward the purchase if the option is exercised. This is referred to as rent credit, which most institutional lenders will accept as part of the down payment if rental payments exceed the market rent and if a valid lease-purchase agreement is in effect, a copy of which must be attached to the loan application.

This basically means you are leasing or renting a property with an option to buy it at a future date. The future price of the property should be fixed at the time the lease-option is signed.

Usually there is an up-front payment of some amount to purchase the option. The amount can vary. Sometimes the monthly payment is larger than normal Rent and the excess is used to purchase the option. In some cases, the option money can be applied toward the down payment for the later purchase of the home.

Lease-options are usually done during a slow real estate market. During a hot market, the seller can simply sell the home in the regular manner.

What risks do a lease option hold for the buyer?

Individuals who attempt to buy homes on a lease-option rarely end up buying the home. This often has to do with the reason they try to buy on a lease-option. They usually cannot qualify for a home loan and expect that they will be able to qualify after a period of time. Later, they find they still cannot qualify - whether it is because of poor credit, lack of income (document able income), or lack of savings to have a large enough down payment.

If this happens, you lose any option money you might have paid up front or as part of your monthly payment.

What benefits do a lease option hold for the buyer?

I'll give you one recent example:

A couple got involved in a lease-option some time ago, just before the real estate market turned. As a result, by the time the option was about to expire the home was worth much more than the option price. They exercised the option to buy and sold the house in a double-escrow, pocketing a tidy sum. Of course, they could have simply bought the home, but they still could not qualify for the home loan.

It would have been much easier if the lease-option had a clause allowing the couple to "assign" the option to a third party, but most sellers are savvy enough to include a "non-assignable" clause in the lease-option contract.

What benefits do a lease option hold for the seller?

  • They often get to sell the house at a higher price than they could sell it in a normal transaction.
  • They can sell the house during a slow market.
  • By being able to collect a larger monthly payment than they could obtain in a normal lease, the property "cash-flows" and they don't have to come up with money out of their own pocket each month to make the mortgage payment.
  • They get some up-front option money and when the buyer cannot exercise the option, they get to keep it.

I would appreciate knowing how a contract is worded in a "rent with option to buy" situation. Or is there a site I could download such sample forms?

I found a place where you can buy such a form for $14.95 on line. The URL is http://kaktus.com/opt/opt4.html.

The lease part of the form is pretty straightforward most of the time and is just like any other lease. The option just means that you have an "option" to purchase the home within a specified period of time. It makes sense to specify the option price in the lease/option contract.


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