Many people have heard of a lease-option, but don’t know exactly what it is, or when it is appropriate. It’s often referred to as “lease purchase,” “rent-to-own” or “lease with option to purchase.”

It is a type of real estate contract (actually three contracts) that is typically between two parties: the tenant (also called the lessee), who will occupy a house or apartment, and the owner/landlord (lessor), who owns the property. A lease-option needs to be in the interest of both parties to work, but in today’s market, it is often an excellent idea to consider.

Typically with a lease option, the lessee would pay an up-front option payment to secure the purchase of the property at a future date for an agreed-upon price (“option contract”). This option payment is usually credited toward the purchase price if the lessee exercises the option. The option amount is negotiable, but is often at least 3% of the purchase price.

During the term of the lease (typically six months to a year), the lessee pays agreed-upon rent to the lessor, and in exchange is permitted to occupy the property (“lease contract”). Often all or a portion of the rent is credited toward the purchase. The rent is typically market rate, but if the lessee makes a smaller option payment, the rent might be a little bit higher.

At the end of the lease term, the lessee has the option to purchase the property outright for the agreed-upon price, minus the negotiated credits from the option payment and rent (“purchase contract”). If the lessee does not exercise the option to purchase the property at the end of the lease, then the lessee forfeits these payments to the owner.

For example:

• Purchase price: $800,000
• Lessee to pay: $25,000 option payment plus rent of $3,000 per month ($1,000 of which credited toward purchase)
• At the end of the year: lessee could purchase the house for $763,000 ($800,000 – $25,000 option – $12,000 rent credited to purchase)
• If the lessee does not exercise the option: owner keeps $25,000 plus all rent ($36,000), and would put the house back on the market in a year.

In order for it to work, a lease-option needs to be in the interest of both the lessor and lessee, but in today’s market — particularly in Marin County — this is often the case. Many potential buyers have homes to sell before they can buy, but they may need to move to relocate for work, school districts, divorce or other reasons. With the residential sales market much slower that it has been in the past, buyers may not want to wait until they sell their house before they find their new house (or sell at a loss), and they may not want to have to move twice (rent one place and then buy another later). Other buyers may need to improve their credit or save for a down payment before they buy, and like the idea of an option payment and some of their rent being credited toward a purchase down payment, almost like an automatic savings account.

Owners are also attracted to lease-options for a variety of reasons. If they have been unsuccessful in selling their home for several months, they may want to receive some rent from the property rather than having it sit vacant. And if their ultimate goal is selling the property, they may prefer a lease-option versus a straight lease in order to avoid having to put the house back on the market. In addition, if the seller wants to make repairs or has debts or expenses, the option money can be used for these purposes. Finally, with the uncertainty of the market right now, sellers may find it in their interest to lock into a price now, rather than waiting to see what the market will do at the end of the lease term.

Although lease-options may seem complicated at first glance, it may be the best solution for all parties involved. A knowledgeable Realtor should be able to guide a lessee or lessee simply and easily through this process.