Information on Lease Agreements With Option to Purchase

Many people who put their homes on the market never stop to think about the potential buyers'
financing arrangements other than "are they pre-qualified?" Generally, seller financing is not
something homeowners factor into the equation because they aren't aware of the benefits or don't fully
understand the process. In a slow market, seller financing, especially the lease option, can be one way to get a house sold quickly and at the price you want.

What Is A Lease Option?

Sometimes called "rent-to-own," a lease option is pretty much what it sounds like: a buyer leases a home and has an option to purchase the home at the end of the lease. This type of purchase involves two contracts, a basic lease and an option-to-purchase contract.

How Does It Work?

It's quite simple, really. The lease option is very much like a standard lease situation, where there is a landlord and a tenant. The differences: how the lease is structured and the addition of another contract, the option to purchase.

Following are the basic components to the lease option.

Purchase Price

How much will the tenant/buyer pay for the home after the lease is up? This is, of course, one of the main negotiating points in this type of home purchase.

The agreed-upon purchase price sets the stage for all the other components in the lease-option arrangement.

Lease Term and Payment

Next, it's time to hammer out the details of the lease.

Lease term is simply the amount of time the tenant/buyer will lease the home. This length of time is negotiable.

The lease payment is the tenant/buyer's rent payment. The amount of the lease payment is usually higher than market rents; the excess to be used as the rent credit. For example, if market rent for the home is $500, the tenant/buyer may pay $700. The excess $200 is set aside for the down payment on the home when the option is exercised.

The amount of the payment in excess of market rate is negotiable, and is known as "rent credit."

Option Consideration

The tenant/purchaser is required to deposit what is called "option consideration" money. The amount of consideration one will pay varies. Generally, it is a percentage of the purchase price of the home. The option consideration is non-refundable, meaning that if you decide not to purchase the home, it will not be returned to you. Should you decide to exercise your option to purchase, on the other hand, the option consideration will be credited toward your down payment.

Option Term

The option term is the amount of time that the lease runs prior to the tenant exercising the option to purchase. Terms vary and are negotiable. Typical option terms run from one to five years.

Option Consideration

The tenant/purchaser is required to deposit what is called "option consideration" money. The amount of consideration one will pay varies. Generally, it is a percentage of the purchase price of the home. The option consideration is non-refundable, meaning that if you decide not to purchase the home it will not be returned to you. Should you decide to exercise your option to purchase, on the other hand, the option consideration will be credited toward your down payment.

Because the lease option is is relatively easy to negotiate between buyer and seller, many people don't feel the need to consult an attorney. Because the lease option is a legal arrangement, and the option portion an actual contract, it is usually in your best interest to consult with an attorney.

References

• National Association of Realtors

Resources

• RISMedia: What is a Lease Option?
• CNN Money: Rent to Own