Lease Option
Definition and meaning of Lease Option in real estate.
A lease option is a contract that grants a tenant the right to purchase the rented property at a predetermined price within a specified time frame. This arrangement combines a traditional lease agreement with an option contract, giving the tenant flexibility without the obligation to buy.
In more detail
To secure this right, the tenant typically pays the landlord a non-refundable upfront fee, often called option money or consideration. During the option period, the owner is barred from selling the property to anyone else. A portion of the tenant's monthly rent payments may also accumulate as rent credit, which is applied toward the down payment if the purchase option is exercised.
If the tenant decides not to purchase the property by the end of the term, the option expires, and the landlord retains the option fee and any accumulated rent credits.
Key facts
| Category | Leasing & Property Management |
|---|---|
| Also known as | Rent-to-own agreement, lease with option to buy |
| Who pays | The tenant pays the non-refundable option fee |
| Watch out for | Losing the option fee and rent credits if you do not buy |
A tenant rents a single-family home with an option to purchase it for a set price within three years, paying an upfront option fee of several thousand dollars.
Frequently asked questions
Is the option fee applied to the purchase price?
Yes, in many lease option contracts, the upfront option fee is applied as a credit toward the final purchase price if the tenant decides to buy the property.
What happens if property values drop during the lease option period?
If property values decrease, the tenant can choose not to exercise the option to buy, though they will lose their upfront option fee and any accumulated rent credits.
Related terms
Sources & references
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