What is a Lease with Option to Purchase?

What is a Lease-to-Own?

What is a lease with option to purchase, and is it right for you?

With all the recent foreclosures across the country, many homeowners have taken, and continue to take, financial losses on their homes. These thousands (millions?) of up-until-recently homeowners do not have a tenant mindset. They are not renters. Yet, they no longer have the credit needed to purchase a new home, or possibly even the money saved for a down payment.

What option do they have now beyond rental? What do they do to find their next home?

Their perfect home solution may be a Lease with Option to Purchase.

Lease with Option to Purchase works very much like a rental. The buyer moves into a property owned by someone else and pays them a monthly amount to live there. The difference between a lease with option to purchase and a straight rental is that the lessee/tenant is actually working toward owning the home at a future date.

Typically, two contracts are signed, the rental agreement and the lease option agreement. The additional lease option agreement spells out the terms of the future purchase of the home such as:

  1. the amount of time the lessee has to purchase (typically 12-36 months)
  2. the purchase price of the home
  3. the amount of lease option fee (or “down payment” to move in)
    • which actually “buys” the lessee the right to purchase the home at a future date
    • is typically required at the time of contract signing
    • at purchase, all or part of the lease option fee is credited toward purchase
  4. any possible seller financing terms
  5. any other terms or conditions of the lease (ie. – a portion of the monthly lease payment may be given as credit toward purchase)

There are many great things about a lease for the lessee.

One is that they actually have a contract toward buying the home they live in. While their lease is in effect, the home cannot be sold to someone else (like a rental can). This gives them time to save a down payment and work toward improving their credit score. The lessee can experience the pride of ownership that they cannot have while renting. The purchase price is locked in at the time of lease signing so they know exactly how much they need to qualify for. And, at anytime if they decide not to purchase the property but rather to move, they can move on and the contract ends. That’s a freedom you don’t have with an actual purchase and mortgage.

Something to think about!

Please leave your lease option questions in the comments section below. I look forward to helping you soon!

This post has 10 Comments | Would you like to leave a comment?

10 Comments

  1. Hi Fiona:
    This is a question for your real estate attorney. But, as you’ve written the question here, it seems that you’ve given your tenant the right to renew or purchase, so they will be protected by that contract for the 2 years. If they have a contract, you are obligated to fulfill it as are they.

    Please let us know how this turns out and thanks for asking!

  2. Hi Karen

    As a landlord I have rented my house out for a year with the renters having the option to rent for a second year or to purchase the home after the first year. If I want to move back into the house after the first year is up is there any legal reasons that I can’t? Am I obliged to rent to the tenants for the second year, or to sell to them?

  3. Hi Frank:
    A very viable concern. However, lease to own is also a very helpful option for many who can’t qualify today to make a purchase but really want to own the home. We screen heavily to make sure lease option tenants have the job and income to afford the property, and we take steps to make sure they are on a path to ownership before we get their down payment and sign contracts. For example, they must first talk with a lender who will work them through the process telling them exactly what they need to do in order to qualify for a loan.

    And, our lease option contracts are recorded on public record. Everything is done per state law and in the effort to help a potential homeowner have the best chance they can to get a home they would otherwise miss out on. We have had many “tenants” end up being able to make their purchase and that is a great feeling.

    There are ways to make almost any possible transaction work in real estate. There are also ways to take advantage of others which is the reason for so many consumer protection laws on the books.

    I’m glad to know you’re not the type to knowingly take advantage of another. Here’s wishing you tremendous success with your rental!

  4. I am working on renting my present home as we purchase a newer one at the end of the month. Someone approached my realtor friend with this proposal / Lease option. Personally Karen, as you mentioned, only 5% of the people choosing that option end up purchasing the home. While I can see the advantages for the Landlords (my wife and I), with a large non-refundable deposit and higher rents since a portion of it goes towards the down payment, I have always considered this practice as a rip-off, since so few lessees end up being in a position to ever purchase the house anyway. Those are just my thoughts and my reluctance to using this technique, as you should go into this business with the mentality of helping out people rather than for your own self benefits.

  5. Andrew:

    I think national averages show that only about five percent of lease option tenants actually end up cashing out on their purchase. You really have to screen for a qualified lease option candidate.

    To your success!

  6. Owner financed land in Maine happens a lot if not a cash sale because banks are stiff on acreage loans, can not sell the mortgage. But homes with lease purchase..find that often the ability to pay today is not rosy the next year or two either. Credit, debt ratios and history are key to sizing up what do we have here….

  7. No. It is non-refundable. The money is a purchase of the right to buy the home at a future date. It locks in your purchase price and prevents the landlord from selling the house out from under you as simply a tenant.

    Your lease option down payment is applied to your purchase at the time you convert to owning either through a bank loan or through owner financing.

    Thank you for your question.

  8. If you put down payment for lease will you get that money back if you choose not to purchase the home?

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