A lease option is an agreement within a lease that after a fixed period of time, often 12 to 24 months, the tenant may opt to purchase the property. If the option is exercised, a portion of the rent will be applied to the down payment on the property. The purchase price of the property should be specified when signing the lease option.
The lease option agreement usually restricts any right to transfer or sell the lease option to another person. The ability to transfer or sell the lease option can be negotiated before signing the lease option. Thus, if a tenant wishes to have the option to transfer or assign the lease option, they should attempt to obtain it during negotiations.
A lease option agreement has benefits for both the buyer and seller:
- Benefits for a Buyer
- Only a small amount of upfront cash is required. It usually consists of the first months rent, a security deposit, and the non-refundable fee to purchase the option.
- The buyer builds a rent credit toward the down payment. Typically, the rent credit is 10% to 20% of the monthly rent.
- The value of the property may increase before exercising the option, meaning the tenant essentially obtains the property at a discount.
- Benefits for a Seller
- Ability to charge tenants a rent that is higher than the market rent.
- Command a better price for the property than if selling the property in a traditional transaction.
- Easier to sell the property in a slow market. Many prospective buyers who cannot afford a down payment can usually afford the monthly rental payments.
- The tenant is more likely to respect the property and treat it like an owner.
Lease options can be quite complicated. A real estate attorney can guide you through the process of buying or selling your home, and can help you negotiate favorable terms in the lease option agreement.