A lease-option is a legal agreement between the owner of a property and a potential buyer of the property. You may also hear this type of agreement referred to as a lease-purchase agreement. While many people use the terms interchangeably, they do not necessarily always mean the same thing. A lease-purchase agreement states, in effect, that the potential buyer has the option at some point in the future to purchase the property if he or she meets certain stipulations prior to that date, including paying rent on the property in a timely fashion. A lease-option may include other options on the property in addition to purchasing the property. The lease-purchase or lease-option agreement is a form of creative real estate investing and may also be termed “flexible financing.”
Usually a lease-option agreement involves a rental agreement, or lease. The owner of the property agrees to rent the property to the lessee for a predetermined period of time – usually one or more years. The lessee agrees to pay a certain monthly amount in rent on the property. At the end of the lease’s terms, if the lessee has made timely payments and meets any other owner-required stipulations, such as making a down payment or coming up with alternate financing, then the lessee is guaranteed the option of purchasing the property at a predetermined price. Lease-purchase agreements are particularly useful when a homeowner wants a high price for their property and is willing to work with a buyer in order to get it. For example, if you wanted to get $200,000 for your home but comparable properties in the area were selling for $130,000, you would not be very likely to get your asking price with a conventional buyer. However, a buyer without the credit to get a conventional loan might be willing to pay $200,000 in exchange for owner financing. This might make you nervous. After all, if the buyer’s credit is not good then how can you be sure that he will pay you? A lease-purchase agreement enables the buyer to show you that he is willing to pay over a period of time and enables you to get a higher price on your home than you would otherwise be able to get.
Lease-purchase agreements are popular with real estate investors because they enable them to essentially get loans and temporary (or sometimes permanent), built-in financing on properties. A real estate investor might get a property under a lease-purchase agreement, and then sign that agreement over to another buyer for a fee. Then, it would be up to the person to whom the contract was assigned to fulfill the contract and ultimately purchase the house. Of course, any successful creative or flexible financing relies heavily on carefully worded contracts that protect all parties involved in the transaction. You should work with a real estate attorney any time you attempt such a transaction to make sure that your interests are protected before you ever sign off on such a deal. Lease-purchase and lease-option agreements have not received a lot of media attention in today’s real estate market, but they are a great way to finance properties if the owners are willing and a fantastic way to garner above-market-value prices on homes in a time when home values are falling.
