With housing inventory still lagging, sellers continue to have the upper hand.
What is a lease option?
A lease option is a written agreement in which an owner allows a person to use a property in exchange for rent, and also gives that person the right to buy the property for a specified price within a specified period.
A lease option may take on a few different forms, depending on what the owner and tenant agree on. Lease options include:
- Lease-to-buy option.
- Rent-to-buy option.
- Lease with the option to purchase.
Regardless of the term used, lease options give tenants the chance to purchase the home they rent at the end of their lease term. Often, lease options differ from strictly rent-to-own scenarios, in that tenants aren’t typically required to purchase once the term ends.
A lease option is a good way for homebuyers who don’t have a down payment or who have poor credit to accumulate a down payment for a future home, without the risks associated with a mortgage payment.
The down payment is collected by the owner through a premium charged throughout the term of the lease. The owner then applies the cumulative premium paid toward the property purchase price in the form of a down payment.
Lease options may have a term from one to three years, or any other period as determined by the owner and tenant. The list price for the property is established either prior to signing the lease agreement or at the end of the lease period.
Lease option example
If you enter into a lease option agreement with a landlord to purchase a home in your area, you sign a contract with the landlord to outline the terms of your lease and reserve the home for your purchase at the end of the lease.
If the term of your lease is two years, your monthly rental payments include a premium that likely makes your monthly payments higher than the market average for your area. For example, your monthly payment might be $1,200 with a $500 monthly premium, which is $1,700 per month.
At the end of your lease, the cumulative premium — $500 times the 24-month lease period — would be $12,000, which is then applied as a down payment on the purchase of the home.
Learn more about the questions that you should ask before entering a leasing option.