What is a Lease Option

A lease option is actually a lease with an option to buy. It refers to an agreement between a buyer and seller of property and is a contract valid for both residential and commercial property. Lease option is different from a lease purchase in which both parties are bound to the sale agreement. However, a lease option makes it binding only to the seller, with the buyer not bound to buy the property in question. However, the buyer does have to state an amount as valuation at which he will get the right to buy at a later date.

Features of a Lease Option

  • Buyer buys the option for a property at a price decided upon as the cost of the option.
  • A price is mutually agreed upon by the buyer and seller and this will be the price at which the option will be exercised.
  • For residential property the period of time during which the lease option has to be exercised ranges between one to three years.
  • The buyer may have to pay a monthly lease payment, which may or may not be adjusted against the purchase price of the property.
  • The two parties have to agree whether the buyer can further sell his option to a third party, whether he wishes to stay in the property or sub lease it.
  • Distressed properties are purchased by investors, renovated and upgraded and then offered as lease options to interested buyers.
  • Payment of maintenance, utilities, taxes etc have to be decided between the buyer and seller.

A lease option is similar to a lease, except that in a lease option, the buyer has the purchase option at a later date. This option is used by a buyer if he is relocating or setting up a business and does not have the resources at present to pay for the property. It is preferable to a mortgage since the risk element is far lower in this option. For the seller, it holds promise of higher returns and a definite chance of his property being sold. It also provides a price security to the seller in case the value of the property declines. These are therefore more popular in a slow market besieged by recession. Sellers may not agree to a lease option generally when the prices of real estate are increasing. Lease options are good for first time property buyers, since it gives them time to collect their resources to pay for the property they have selected, after 1-3 years. Such a situation arises when they do not have the savings for a down payment. They may even be able to come to an agreement to live in the house they plan to buy through the lease option.

Steps to complete before taking a lease option

  • Is lease option the best alternative financially? This involves verifying whether you can afford the monthly lease payments, and whether there is a certainty of managing to collect the money for the purchase eventually, so that buying the option is not just a waste of money.
  • Checking whether the property is the best available in the area
  • Get a valuation done of the property from a professional.
  • Negotiate the terms with the seller and draft a good contract.
  • Verify the insurance details.

Once all these are looked into, a lease option may bring you closer to your dream property

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