What is a Lease Option?

Buying a home can be a frustrating process, especially when you don’t have the best credit or financial stability. Many homeowners are leaning towards lease to own agreements to get around such problems.

You should never agree to a contract without having a full understanding. We’re here to help you understand all there is to know about lease options to see if it’s a good fit for you.

What is a Lease Option?

A lease option is a contract between a homeowner and a tenant, which allows the tenant to buy the rental property during or after the end of the rental period. Many people like to use this option to purchase a home or to test out a location before deciding whether to buy.

After the homeowner and the tenant sign the lease, the property becomes unavailable to any future interest. The owner is not allowed to sell the property to another buyer, nor can they require the tenant to vacate the premises for the reason of selling.

Once the rental lease is up, the current resident has to decide whether they want to proceed with the purchase of the current home or if they want to terminate their contract altogether. This often means the tenant moves out of the current resident, and the house is available to new customers.

Why Use a Lease Option Agreement?

There are advantages to agreeing to a lease to own agreement over a standard leasing agreement. Standard leasing agreements often require the buyer to have hefty down payments and good credit. Unfortunately, this doesn’t apply to everyone.

Lease to own agreements allows homeowners to ease into buying a home after finishing up a rental phase. Many people use this rental period to work on improving their credit so they can apply for a traditional loan to complete the purchase. Or they are saving up so they can afford the down payment for their approved loan.

Another benefit of agreeing to a lease-purchase is that the buyer and the homeowner decide on a price before the start of the lease, often based on current market value. This arrangement helps the buyer because they don’t have to worry about the final cost of the home changing due to future trends.

If a price isn’t set at the beginning of the lease, there will be terms listed that explains how the final cost will be decided at the end of the contract.

Most lease-to-own agreements are for one to three years, but the buyer and seller choose the time frame. You might decide to go for a more extended option, such as five years. As long as both parties are in agreement, you choose whatever time frame would work for your situation.

Down Sides of a Lease-Option

There are some downsides to using a lease option agreement that we feel we should discuss.

Many homeowners require a substantial fee, often at least 1% of the overall sales price, before entering into a lease-to-own agreement. This cost might go the downpayment of your home if you decide to buy once the lease is up. In other cases, the money might go into the buyer’s pocket as compensation for taking your home off the market for other buyers.

When you’re renting to own, you might pay a higher cost than you would if you were renting. The extra fees, which are frequently referred to as rent credit, go towards your downpayment after the lease concludes. However, if you choose not to purchase the home, this extra money will not be returned to you.

How to Set Up a Lease Option

Before you sign a lease option agreement, it’s best to have it drawn up by an impartial lawyer or mediator, who can ensure the contract is fair to all parties. Real estate lawyers are the best for this kind of matter.

Your lawyer should make sure that there are some things done before the lease is signed, including:

  • Home inspection
  • Getting an appraisal
  • Reviewing the title policy
  • Verifying seller disclosures
  • Pest inspections
  • Roof certification
  • Home warranty plan
  • Homeowners insurance (you should also have rental insurance)

You should never agree to purchase a home without having it inspected and appraised. Many renters decide to have a second appraisal done before the conclusion of the lease so they can be sure the home value has not depreciated, meaning they could get a lower final cost.

Is a Lease-Option Right for You?

Lease-options can be a useful tool for people who haven’t had the best luck with their financial situation. No one should have to give up their dream of the perfect home simply because they don’t have the right credit or enough money saved up. Lease-options give you a chance to test out your dream home while you get the ball rolling so you can own it one day in the future.