How Does a Lease-Option Work?

Why Consider a Lease-Option?

A lease-option should be considered when leasing and buying a home when one or more of the following factors are involved: (1) the buyer does not have enough money for the down payment; (2) the buyer has some credit problems that can be repaired within the term of the lease-option; (3) the buyer is moving from another state or area and wants to make sure he likes the neighborhood before he buys; or (4) the buyer is unsure how long a job opportunity will last and may not want to commit to a purchase right away. There are also reasons a seller would want a lease-option. Most of the reasons would be due to federal and state tax planning, however, the seller may also believe a slower market is coming and wants to find a buyer now, but not make the actual transfer until a later date.

Most Common Structure

The most common way to structure a lease-option is to add an addendum to a lease stating the terms of the option. Taking them one by one and understanding why they are important to include will help you get a picture of how the lease-option works. Usually you will pay a certain amount of money over and above the normal lease amount. This money will go toward your down payment if you choose to go through with the sale. The extra money should be well documented for this purpose or you could end up not qualifying for your mortgage. The extra money you are paying will be non-refundable in this option.

Important Terms to Include

Have the sale price determined and added to the addendum before you sign the contract. If not, you are paying non-refundable money for a house you may not be able to afford. When and who will pay for inspections should also be stated. Normally, inspections are done for the sale, not for a lease. A home inspection should be done before signing the contract in case there is a major issue that cannot be worked out between the buyer and seller at the time of the sale. If you are not going to do the home inspection first, make sure there is a clause stating that your extra money will be refunded if there is a major problem with the house.
Another area of question is the title insurance. Write in the addendum that you must be able to obtain title insurance on the property at the time of the sale. Because real estate law changes so frequently, make sure any contract you are thinking about signing is reviewed or written by a real estate attorney. One missed clause can cost both buyer or seller thousands of dollars.