Key Differences Between a Lease Option & Lease-Purchase Agreement

If you’re considering a rent-to-own contract, you may wonder what the difference is between a lease option and a lease-purchase agreement. While these terms are sometimes used interchangeably, they’re technically two different types of rent-to-own agreements.

In this article, we’re going to explore some key differences between lease option and lease-purchase agreements, how to tell which one is right for you, and some potential benefits and drawbacks of each.

Lease Option Agreements

With a lease option agreement, the tenant/buyer has the OPTION to purchase the property at a set price during or at the end of the lease term. This option is typically granted in exchange for an up-front fee (option consideration) paid to the landlord/seller.

The key word here is “option.” A lease option gives the tenant/buyer the right to purchase the property if they so choose, but they’re not obligated to do so. If at the end of the lease term, the tenant/buyer decides not to purchase the property, they simply walk away with no further obligation.

Are Lease Options a Good Idea?

Lease options can be a great tool for tenants/buyers who are not quite ready to purchase a property but want to lock in the purchase price in case prices rise in the future.

For example, let’s say you’re interested in purchasing a home in the next few years but you’re not quite ready yet. You find a property that you love but the seller is only willing to do an option agreement.

You decide to go ahead with the option and pay the option fee. At the end of the lease term, you have the option to purchase the home for $300,000 (the price you agreed upon when signing the agreement).

In the meantime, housing prices in the area have increased and similar homes in the neighborhood are now selling for $325,000. Because you locked in the purchase price when you signed the agreement, you’re able to buy the home for $300,000 even though it’s now worth more.

What is an Option Fee?

An option fee is a non-refundable fee paid by the tenant/buyer to the landlord/seller when entering into a lease option agreement. This fee gives the tenant/buyer the right to purchase the property at a set price during or at the end of the lease term.

Option fees are typically 1-5% of the purchase price of the property and are credited towards the down payment if/when the tenant/buyer exercises their option to purchase the property.

Lease Purchase Agreements

With a lease-purchase agreement, the tenant/buyer is obligated to purchase the property at the end of the lease term. This obligation is typically in exchange for a smaller up-front fee (option consideration) paid to the landlord/seller.

The key difference here is that with a lease-purchase agreement, the tenant/buyer is contractually obligated to purchase the property at the end of the lease term. If they don’t, they may be subject to legal action from the landlord/seller.

So, which type of rent-to-own agreement is right for you? That depends on your unique circumstances and goals. Here are some things to consider:

• Are you interested in purchasing the property or just renting it for now?
• Are you ready to purchase a property now or do you need some time to save up for a down payment?
• Do you want the flexibility to walk away from the property at the end of the contract if you decide you don’t want to purchase it?
• Are you comfortable with the idea of being legally obligated to purchase the property at the end of the lease term?

If you’re interested in purchasing a property but need some time to save up for a down payment, a lease option may be a good option for you.

On the other hand, if you’re certain that you want to purchase the property and are comfortable with the idea of being legally obligated to do so, a lease-purchase agreement may be the right choice.

How is Each Agreement Structured?

Both types of real estate agreements can have the same provisions and be structured in the same way. The key difference is the requirement for the tenant/buyer to purchase the property at the end of the lease term with a lease-purchase agreement.

Both types of agreements typically include:

The Lease Period

In addition to the traditional elements of a property lease agreement, there will be a few extra clauses that come along with the contract. Some of the typical clauses included are:

• Purchase Price: This is the price that the tenant/buyer has agreed to pay for the property at the end of the lease term.
• Down Payment: This is the amount of money that the tenant/buyer will need to put down in order to secure the property.
• Option Fee: This is a non-refundable fee paid by the tenant/buyer to the landlord/seller when entering into a lease option agreement.
• Rent Premium: The rent premium is the portion of the rent payment that is credited towards the purchase price of the property.
• Repair and Maintenance: Who is responsible for repairing and maintaining the property during the lease term?
• Contract Violations: What happens if the tenant/buyer violates the terms of the agreement?
• Eviction: What is the process for evicting the tenant/buyer if they violate the terms of the lease agreement?
• Option Fee: As we discussed earlier, this is a non-refundable fee paid by the tenant/buyer to the landlord/seller when entering into a lease option agreement.
• Lease Term: The length of time that the tenant/buyer has to live in the property and save up for a down payment.
• Maintenance and Repairs: Who is responsible for maintaining and repairing the property during the lease period?
• Option to Purchase: This gives the tenant/buyer the right (but not the obligation) to purchase the property at the end of the contract.
• Property Taxes: Who is responsible for paying the property taxes?
• Homeowners Insurance: Who is responsible for maintaining homeowners insurance on the property?
• Default: This area should outline what happens if the property owner defaults on their mortgage payments during the contract period.

How a Buyer Benefits from a Lease-to-Own Agreement

Lease options and lease purchase agreements are often the most beneficial for renters and first-time home buyers. Some of the most common benefits of these types of lease agreements are:

• Allowing tenants to live in the property before they purchase it
• The ability to build equity in a property without having to make a large down payment
• Providing flexibility for tenants who may not be able to qualify for a traditional mortgage
• Allowing tenants to get their feet wet with the idea of homeownership with a smaller financial commitment

How a Seller Benefits from a Lease-to-Own Agreement

Lease options and lease purchase agreements can also be beneficial for sellers. Some of the most common benefits of these types of lease agreements are:

• The ability to sell a property that may be difficult to sell using traditional methods
• The ability to receive a higher sales price for the property by including the option fee and rent premium in the purchase price
• The ability to have a guaranteed buyer for the property at the end of the lease term
• The ability to continue to receive rental income from the property during the lease term

Things to Consider Before Entering Into a Lease-to-Own Agreement

Before entering into either type of agreement, there are a few things that you should consider. These things include:

• Your credit score and history: In order to qualify for a mortgage, you will need to have a good credit score and history. If you don’t, you may want to consider working on your credit before entering into a lease-to-own agreement.
• Your employment situation: In order to qualify for a mortgage, you will need to have a steady job. If you don’t, you may want to consider stabilizing your employment situation before entering into a lease-to-own agreement.
• Your financial situation: Can you afford the monthly payments? Do you have money saved up for a down payment? If not, you may want to consider saving up before entering into a lease-to-own agreement.
• The condition of the property: Is the property in need of major repairs? If so, you will need to factor in the cost of repairs when considering a lease-to-own agreement.
• The length of the contract: Make sure that the length of the lease is realistic for your situation. You don’t want to be stuck in a lease-to-own agreement for longer than you need to be.
• Default provisions: What happens if you default on the arrangement? What happens if the seller defaults on their mortgage payments? Make sure that you are clear on the default provisions before entering into a lease-to-own agreement.

Making the Right Choice for You

The type of rent-to-own agreement you choose should be based on your unique circumstances and goals. If you’re not sure which type of agreement is right for you, it’s a good idea to speak with an experienced real estate agent who can help you navigate the process.

If you’re not sure which type of agreement is right for you, we recommend speaking with an experienced real estate agent. They can help you understand your options and make sure that you’re protected in any agreement that you sign.

To find a leasing agent near you, let FastExpert can help. With FastExpert, you can easily find experienced real estate agents who will work with you to find the perfect lease-to-own agreement. We’ll even provide you with a list of agents who have experience working with people in your unique situation.