How a Lease with an Option to Purchase Works

It goes by many names: the rent to own, rent with a purchase option, purchase option lease, lease with an option to purchase, etc. But, no matter what you call it, the idea is that you are entering into a lease agreement that offers you an option to purchase a home eventually.

I’ll explain a little more about how an agreement like this would be structured, but first… I want to explain why someone would choose this option rather than simply purchasing a home.

Why Go the Lease with an Option route?

There are a wide variety of reasons why someone would want to enter a lease with an option to purchase. They might want to test out a neighborhood before committing to it, or maybe they want to buy but have to wait and see how some event in their life is going to turn out first.

However, the two most common reasons people choose this option is that they are either low on cash, or have a low credit score.

Option for Cash Strapped Buyers

Sometimes, a buyer has everything they need except a down payment. There are a lot of low down payment programs out there, especially for first time home buyers. But, sometimes a buyer can’t qualify for these programs due to some other issue.

If that is the case, then the lease with an option to purchase may be a good option. It would allow them to secure a home and a price point today, so they can buy the home later without competing with other buyers.

Option for Buyers with “Bad Credit”

If your credit score is preventing you from obtaining a mortgage, you can use a lease with an option to purchase to secure a home now while you work on your score. This way, you will already have the home you want locked under contract when the time comes to purchase it.

Even if your score is where it needs to be, you can still be turned down for a loan for other reasons such as a recent bankruptcy or foreclosure. Major credit events can prevent you from obtaining another mortgage for years. Some buyers choose to lease with an option to purchase just to wait out the time until they are able to obtain a mortgage again.

How a Lease with an Option to Purchase Contract is Structured

Basically, the lease with an option to purchase is initiated for a specific amount of time, say, 1-5 years. During this time the tenant has the option to purchase the home according to the conditions specified in the contract.

The conditions specified in the contract are negotiable and probably won’t be the same for one tenant-buyer as they are for another.

For example, the agreement might specify that the tenant only has the option to purchase the home at the very end of the lease. Or, the tenant may be able to purchase anytime during the lease, but the purchase price may increase at certain time intervals.

Some agreements require that the tenant pay a fee for the option, either upfront, or amortized over the lease period in the form of higher than market rent. Sometimes, tenants can pay extra monthly fees that go toward their future down payment, turning their rent into a pseudo-savings account.

Review Your Contract

Before entering into any lease agreement, especially one that includes an option to purchase, you should make sure to carefully review the contract. Make sure you understand the terms and that they are acceptable to you before moving forward.

How to Obtain a Lease with an Option to Purchase

There are really only two ways to go about finding lease with an option to purchase opportunities.

1. Approach Homeowners

You can either approach potential sellers yourself, or have a Realtor do it on your behalf. But the idea is that you find homes that you might be interested in and asking the owners if they would be interested in working out a purchase option with you.

Eventually, you should be able to find someone that is interested.

2. Use a Lease with an Option to Purchase Program

There are investors and real estate companies out there that will buy a property to rent to you, and offer a purchase option. You just want to be careful when dealing with a large company that you are making the right decisions in regards to the local market.

If you have questions about utilizing a program like this, I would be happy to help. Feel free to get in touch!

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