A lease option (or lease purchase) is a type of contract used in residential real estate. The contract is typically between two parties: the tenant (also called the lessee), who will occupy a house or apartment, and the landlord (lessor), who owns the property.
During the term of the lease option, the tenant pays rent to the landlord, and in exchange is permitted to occupy the property. At the end of the contract, the tenant has the option to purchase the property outright; the tenant would typically obtain the money to do this using a mortgage. In exchange for this option, the tenant pays extra money to the landlord, in excess of usual market rent.
Excess rent may also be applied towards the eventual purchase of the property, or towards the down payment for a mortgage. In that case, the lease option works as an automatic savings plan for the tenant.
Lease options are often used by tenants with a poor or limited credit history, who would not qualify for a typical mortgage. The lease option may carry less risk for the landlord than a mortgage would for the lender. In the event of non-payment, it may be possible to remove the tenants through eviction, which is likely to be cheaper than foreclosure on a mortgaged property. The lease option may also require less money up front, while a mortgage might require a substantial down payment from the tenant.
If the tenant does not exercise the option to purchase the property at the end of the lease, then the money that the tenant paid for this option was wasted. This might occur if the tenant no longer wishes to purchase the property, or if the tenant wishes to purchase the property but is unable to obtain the financing required to do so. Some forms of lease option have been criticized as predatory, if a lease option is sold to a tenant who cannot realistically expect to ever exercise the option.
During the term of the lease option, the tenant pays rent to the landlord, and in exchange is permitted to occupy the property. At the end of the contract, the tenant has the option to purchase the property outright; the tenant would typically obtain the money to do this using a mortgage. In exchange for this option, the tenant pays extra money to the landlord, in excess of usual market rent.
Excess rent may also be applied towards the eventual purchase of the property, or towards the down payment for a mortgage. In that case, the lease option works as an automatic savings plan for the tenant.
Lease options are often used by tenants with a poor or limited credit history, who would not qualify for a typical mortgage. The lease option may carry less risk for the landlord than a mortgage would for the lender. In the event of non-payment, it may be possible to remove the tenants through eviction, which is likely to be cheaper than foreclosure on a mortgaged property. The lease option may also require less money up front, while a mortgage might require a substantial down payment from the tenant.
If the tenant does not exercise the option to purchase the property at the end of the lease, then the money that the tenant paid for this option was wasted. This might occur if the tenant no longer wishes to purchase the property, or if the tenant wishes to purchase the property but is unable to obtain the financing required to do so. Some forms of lease option have been criticized as predatory, if a lease option is sold to a tenant who cannot realistically expect to ever exercise the option.
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