How to Buy a Lease Option

Four Parts:Locating and Inspecting PropertyExecuting the ContractRenting the PropertyExercising the Option

When you buy a lease option, you are entering into a contract to rent a home for a period of time. During that rental period, often called the “option period”, the other party to the contract (i.e., the seller) will not be able to sell their home. Toward the end of the option period, you will have the ability to purchase the home from the seller for a set price. To buy a home using a lease option, you need to find a suitable property, sign a lease option contract, rent the property for a period of time, and exercise the purchase option.

Part 1
Locating and Inspecting Property

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    Hire a real estate agent. Finding a real estate agent involves balancing an individual’s credentials and personality. You want to choose someone you like as well as someone that can get the job done. To find a qualified real estate agent, ask family and friends for recommendations. Interview a number of candidates to determine whether they have the skill, experience, and personality to match your needs.
    • The agent you choose should be familiar with the area. It is important to have an agent that knows about local schools, amenities, and trends.[1]
    • Look for an agent comfortable with lease options. These real estate deals have wrinkles in them that some agents may not be able to handle.
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    Examine the benefits of using a lease option. Lease options are great opportunities for people who want to buy homes but are not yet financially able to. The lease option gives you an opportunity to “lock in” the house you want to purchase and work towards that goal.[2] You will be able to build equity in the home while still having an opportunity to walk away and not exercise the option.
    • When you purchase a home outright, it is difficult to get out of that deal later. Backing out could mean taking a hit on your credit history and even having to go through foreclosure proceedings.
    • However, with a lease option, if you choose to back out during your tenancy period, the only thing you will lose is money (i.e., the option fee and monthly rent payments).[3]
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    Explore the downside of lease options. Lease options are generally more expensive in the long run than buying a home outright. This is the case because you are paying the seller an option fee, as well as premium rent payments, to keep the home off the market. Additionally, not all of the money you pay the seller during your tenancy will build equity in the home. Depending on the contract you sign, you might also lock in a purchase price that is much higher than what the house ends up being worth when you buy it.[4]
    • Think about all of these things before entering into a rent-to-own contract.
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    Determine where you want to live. You need to find a home you will want to live in long-term. While you are not purchasing a home outright, you are trying to find a home that you will buy in the near future. Therefore, you need to consider a number of important factors about the location of a home. These factors should include:[5]
    • Property taxes. Once you own the home, you will be responsible for paying property taxes annually. It is important to know what your liability will be before entering into a lease option contract.
    • The school system in the area. If you have a family, you need to consider the education quality in the area you are looking.
    • Crime rates. You want to make sure the neighborhood you move into is safe.
    • The job market. You and your family will have to have gainful employment so you have the money necessary to pay rent and purchase the home when the time comes.
    • Amenities. Make sure the area you are interested in has the activities you want (e.g., movie theaters, parks, hiking trails, pools).
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    Find out how much you can afford. Most people entering into lease option contracts do so because they do not have the financial strength necessary to buy a home outright. With that said, you still need to be able to afford monthly rent payments, option fees, and other up front costs associated with renting to own. In addition, you should feel confident in your ability to secure financing when the lease expires, which will usually be about one to three years after you enter into the contract.
    • If there is a good chance you will not be able to qualify for a mortgage when the lease expires, do not enter into a lease option contract. Instead, continue renting and building financial strength.[6]
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    Find sellers willing to work with you. Not every property owner wants to sell their home through a lease option. When a seller enters into a lease option contract, he or she will become a landlord for a period of time and will not have the ability to freely put their home on the market. However, certain sellers benefit from this sort of arrangement.
    • Sellers having difficulty finding buyers (i.e., sellers with homes that have been on the market for a long time) might be willing to sign rent to own contracts.
    • Sellers who need quick money will often enter into these agreements as it will give them a long term source of income (in the form of rent payments) as well as a check for the option fee.
    • Some sellers will also enter into these agreements hoping you will not exercise the purchase option. In these scenarios, the seller will be able to take back possession of the home while keeping your premium rent payments and option fee.[7]
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    Choose the right property. Once your agent understands what you are looking for, he or she will round up a series of properties to show you. Visit each property and learn about the pros and cons of each one. When you find the property you are interested in, inform your agent.
    • Before executing a lease option contract, you need to have the property inspected to make sure everything is as it seems. You do not want to enter into a lease option contract only to find out that the home’s foundation is cracking, the roof is failing, and/or the property is prone to regular natural disasters.[8]

Part 2
Executing the Contract

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    Hire a lawyer. A lease option contract is a complex document that will lay out all the obligations of each party. Due to the serious nature of entering into a lease option contract, you need to hire a lawyer to help you through the process. If you do not know any good real estate lawyers, contact your state bar association’s lawyer referral service. After answering a few general questions, you will be put in touch with a number of lawyers in your area.
    • Contact each lawyer and set up an initial consultation. During the meeting, make sure the lawyer is comfortable working with lease options.
    • Ask each lawyer whether they have worked with lease option contracts, whether they have experience negotiating contracts, and whether they have experience representing buyers/tenants. In addition, make sure you ask each lawyer about their fee arrangements.
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    Discuss the terms of the rental agreement. When the time comes, you and the seller (along with the lawyers) will need to sit down and draft an acceptable lease option agreement. The first portion of that agreement will be the lease agreement. During the lease term, you will be responsible for paying the seller a monthly rent amount. The lease term needs to be negotiated but it usually lasts from one to three years.
    • In most contracts, a percentage of each rent payment is applied to the purchase price of the home. For example, assume you agree to pay $1,500 in rent each month, with 20% of that payment going toward the purchase price of the home. If the lease term is three years, you will earn $10,800 to apply toward your purchase ($1,500 x .2 = $300; $300 x 36 months = $10,800).
    • Remember, your rent payments will usually be higher than the normal “going rate” in your area due to this rent credit and because you are paying to keep the home off the market.[9]
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    Determine an appropriate option fee. In lease option contracts, you will normally be required to pay the seller a one-time, non-refundable, fee. This fee, called “option money”, gives you the right to purchase the house in the future. In return, the seller promises not to sell the house to anyone else until the option term is up.
    • The size of the fee is always negotiable but often falls somewhere between 2.5% and 7% of the purchase price. For example, if you have agreed to a purchase price of $200,000, you will pay a fee of between $5,000 and $14,000.
    • You should try to negotiate to have part (or all) of this fee applied to the purchase price at closing. Some sellers will be willing to do this if the size of the fee is large enough (e.g., 7% instead of 2.5%).[10]
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    Agree on the duration of the option period. The option period is the amount of time the seller agrees to rent the property to you before the option must be exercised. A typical option period will last between one and three years. The longer the option period is, the higher the option fee is likely to be. When discussing this provision, make sure you negotiate whether the option can be exercised at any time during the option period, or whether the option can only be exercised at a certain time.
    • If you let the option period pass without exercising your right to purchase the property, the option expires. At that time, you will forfeit the option fee and your ability to purchase the property.[11]
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    Negotiate the purchase price. Your lease option contract needs to specify when and how the purchase price of the home will be calculated. As the buyer, you might prefer to “lock in” the purchase price at the time the lease option contract is signed. This is especially true if you live in a market where home prices are likely to increase. However, if you want to lock in your purchase price in the contract, the seller will usually request a price that is higher than the current value.[12]
    • In other circumstances, you and the seller might agree to calculate the price at the end of the option period. This is usually accomplished by having an appraisal done on the home at the time the option is exercised.[13] As a buyer, this is a good option if you think home values will fall during your option period.
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    Delegate obligations to each party. While you are renting the property, title will still be held in the seller’s name. Therefore, the seller will usually be responsible for association fees, taxes, and homeowners insurance. However, because the seller will usually be covering these costs, he or she will usually require you (the buyer) to maintain the property while you are renting it.
    • These maintenance and repair provisions need to be laid out in a great deal of detail. After all, mowing the lawn and cleaning out the gutters is very different from replacing a roof. The provisions need to lay out exactly who will be responsible for what.[14]

Part 3
Renting the Property

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    Move in. You will move into the home soon after the lease option contract is executed. When you get the keys from the seller, he or she will become your landlord and you will become a tenant.
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    Make the required payments. During your tenancy, make sure you make all required rent payments in full and on time. A lot of lease option agreements will indicate that the contract can be voided if one or more payments are late. If you agreed to a provision like this, one late payment could lead to losing the home of your dreams.[15]
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    Maintain the property in good condition. While a tenant in the home, you need to make sure you abide by all maintenance and repair provisions in the lease option contract. Some agreements will contain provisions allowing the landlord to evict you if repairs are not made in a timely and professional manner.[16]
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    Work on your finances. The entire purpose of you entering into a lease option contract is so you can take time to get your finances in order to purchase the home. Use this time to save enough funds to make a down payment and get financially secure enough to qualify for a mortgage. Remember, if you fail to work on your finances during this time, you may not have the ability to exercise the option and purchase the home. If this happens, you will have wasted a lot of money in the form of premium rent payments, option fees, lawyer fees, and real estate agent fees.
    • Cut out the small expenses (e.g., eating out and buying coffee).
    • Sell your car if you can get by without one. This will save on monthly payments, gas costs, and parking costs.
    • Downsize on your current home. If you rent, consider a one bedroom instead of a two bedroom.
    • Live off of one spouse's income.
    • Invest the extra money you have. Do not let it sit in a checking account when you could be making more.[17]

Part 4
Exercising the Option

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    Notify the seller. When your option term is coming to an end, you need to make a decision as to whether you are going to exercise the option and purchase the home. If you decide not to exercise the option (or if you cannot afford to do so), the option will expire.[18]
    • If you want to purchase the property, you will have to notify the seller that you are going to exercise the option. The manner in which you must notify the seller will be laid out in the lease option agreement. In general, the notification will have to be in writing and delivered in a timely manner. The notification should reference the lease option agreement and your intention to exercise the option and purchase the property. Make sure you sign and date the notification and mail it to the seller.
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    Get an appraisal. If your agreement dictated that the purchase price would be determined at the time you exercise the option, the purchase price will now be determined. This will most often be done through the use of an agreed upon appraiser. The appraiser you and the seller agree on will visit the property, inspect it, and determine its value.
    • Some lease option agreements will allow you or the seller to dispute the appraisal value. In some cases you may be able to ask for another appraisal. In other situations, you may have to go through a dispute process that may include mediation and/or arbitration.
    • Once the appraisal value has been agreed to, the purchase price will be set.
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    Apply for financing. At this point in the process, you should already know that you will be approved for a home loan that will cover the purchase price of your home. However, this is the point at which you will have to make it official. Visit your local bank and apply for a mortgage. A mortgage is a home loan in which the bank will loan you money to purchase a home. In return, the bank will use your home as collateral on the loan and you will have to pay the bank back with interest.
    • Mortgages will have different interest rates and terms and conditions based on your financial strength and ability to pay back the loan. Make sure you talk to a professional to understand exactly what to look for in a home loan.
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    Gather the closing documents. The last thing you will do, which will finalize the home purchase, is closing. On closing day, all the parties will sign the legal documents and seal the deal. The day before closing, you need to gather all of the documents you have relating to the purchase. Some of the documents you will need include:[19]
    • Proof of financing
    • The lease option contract
    • Proof of title search
    • Proof of insurance
    • The appraisal
    • Inspection reports
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    Close the deal. On the day of closing, you will sign two main documents. First you will sign the agreement between you and your lender, which will finalize the home loan. Second you will sign the agreement between you and the seller, which will transfer ownership of the property to you. In addition to signing documents, you will also pay the seller all the money owed in order to purchase the home.[20]
    • Make sure you calculate the costs owed accurately. Remember, a portion of your rent payments (and maybe a portion of the option fee) should go to the purchase price. You might also choose to pay some more money down to decrease the amount of your loan. Finally, the bank will write a check to the seller for the remaining balance.
    • At this point, the home will be yours.


  • Make an agreement to pay the mortgage lender directly to avoid situations such as foreclosures. Even if you're paying monthly rent, if the landlord doesn't pay the mortgage, the house can be foreclosed on.

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Categories: Buying Property