What Is A Lease Option?
A lease option is a contract between a property owner and tenant in which both parties agree that the tenant can purchase the rented property during or at the end of the rental period.
A lease option is formally known as a “Lease With the Option to Purchase.” In this setting, a property owner and a tenant enter an agreement that stipulates the tenant has the option of purchasing the property at the end or during the rental period. When the rental period expires, the renter can choose to exercise the lease option or forfeit it.
A lease option should not be mistaken for a lease-purchase contract. Both terminologies are different. A lease-purchase contract is a basis for rent-to-own properties. In the lease-purchase contract, both the property owner and tenant are bound to the sale. Whereas, in the lease option, only the property owner is bonded to the sale. A tenant can choose to not purchase a property after the rental period expires.
The lease option forbids the property owner from offering the property for sale to anyone else unless the tenant decides to forfeit the lease option at the end of the agreed period.
Typically, tenants pay a higher fee than the standard monthly rent. The premium fee charged by the property owner throughout the term of the lease serves as the tenant’s down payment for the purchase of the house. The term for this is usually between one to three years. However, the property owner and the tenant may fix other terms that suit them.
Lease Option Example
A landlord wishes to sell their home, but they have a tenant saving up to buy their own home. The landlord may decide to find a buyer but would have to evict the tenant. In this case, they would lose the monthly rent on the house until it is finally sold. The tenant, on the other hand, may have trouble finding a suitable home to buy within a short period. The landlord and tenant, in this scenario, can agree on a lease option where the tenant would make a 5% down payment of the house price, as well as premium monthly rent. In exchange, the landlord would sell the house to the tenant in two years at today’s price.« Back to Glossary Index