Lease Option

What is a Lease Option?
A lease option, or a rent to own agreement, allows a potential buyer to lease a piece of property for a period of time before committing to actually buy it. The arrangement allows the buyer to exercise the option to buy the property for a set price after having rented it for a specific period. While this kind of agreement can be favorable for both sides, one should know the potential advantages and risks it carries.

Advantages for the Buyer
One of the main advantages of a lease option is the time it affords the potential buyer. It allows them the opportunity to get to know the house and the surrounding community before making a permanent decision. During this time, the buyer can also continue looking at the market because they are not completely committed to buying the property at the end of the allotted time. Another advantage the lease option provides is time for the buyer to save money for a down payment if they do not initially have enough to make a down payment. It’s also possible for the value of the property to rise during the length of the contract; the buyer still has the option of purchasing it at the price determined at the time the contract was made. Although a seller will often charge a higher monthly rent, the increase can often be credited to the eventual payment for the home.

Potential Risks for Buyer
One drawback is that individuals who attempt to buy homes on a lease option rarely end up buying the home, often for the reason they agreed to the lease option to begin with. They usually cannot qualify for a home loan and later find that they still cannot qualify-whether it is because of poor credit, lack of documentable income, or lack of savings. If this happens, the potential buyer loses any option money they might have paid up front or as part of the monthly payment. Also, the buyer needs to be aware of what the seller is doing during the contract period. If the seller is taking out loans on the property, those loans might obscure the future sale.

Advantages for Seller
A lease option is a good way to sell property during a slow market and sometimes it will lead to selling at a higher price than in a normal transaction. Charging a monthly rent higher than market rent creates a cash inflow. The seller also retains the up-front option money if the buyer chooses not to exercise the option. Another significant advantage is that the renter is more likely to treat the property like an owner-they will take better care of the property if there’s a chance that they might soon own it.

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