Lease option: rent now, with the right to buy later

Lease option and lease purchase

The parts of a lease option

• Option fee. A one-time payment for the right to buy, often a few percent of the price. It is usually non-refundable and credited to the price at closing.
• Purchase price. Fixed now, or set by an appraisal at the time of purchase.
• Option period. How long the tenant can decide, often one to three years.
• Rent. Often a bit above market, with part of it credited to the price.
• Rent credit. The share of each payment that counts toward the down payment.
• Repairs. Who pays for what during the lease.
• Exercise notice. How the tenant tells the owner they will buy.

How a lease option works, with numbers

An owner and a tenant agree on a price of USD 300,000 and a two-year option. The tenant pays a USD 9,000 option fee and USD 2,200 a month in rent, of which USD 200 is credited to the price.

After two years the tenant has USD 4,800 in rent credits plus the USD 9,000 fee, or USD 13,800 toward the purchase. If the tenant gets a mortgage and buys, those amounts reduce the cash needed at closing.

If the tenant decides not to buy, the owner usually keeps the fee and the credits, and the lease ends on its date.

Pros and cons for the tenant

• Time to repair credit or save for a down payment.
• A locked price if the market rises.
• Living in the home before deciding.
• Risk of losing the fee and credits if a mortgage is not approved.
• Risk if the owner falls behind on the owner mortgage.

Pros and cons for the owner

• A tenant who treats the home like their own.
• Higher monthly income and an upfront fee.
• A likely buyer without listing the home.
• The home is off the market during the option period.
• The price is fixed even if values rise.

Protections both sides should use

1. 1Check the title and the owner mortgage before signing.
2. 2Record a memorandum of option with the county, so buyers and lenders see it.
3. 3Get an inspection before the tenant pays the fee.
4. 4Write how credits are handled if the sale does not happen.
5. 5Ask a lender early what it will accept as down payment.

Some states, Texas among them, treat certain residential lease options as executory contracts with added disclosure duties. Check your state rules before signing.

Lease option agreement template

Fill in the brackets. Attach your lease agreement, or include its terms, since this agreement adds the option to a lease.

LEASE WITH OPTION TO PURCHASE

This agreement is made on [date] between [owner name], the Owner, and [tenant name], the Tenant, for the property at [address], the Property.

1. 1Lease. The Owner leases the Property to the Tenant from [start date] to [end date] under the lease attached as Exhibit A.
2. 2Option. In exchange for an option fee of [amount], paid on signing, the Owner grants the Tenant the exclusive option to buy the Property during the lease term.
3. 3Price. The purchase price is [amount], or [the appraised value at the time of exercise, if chosen].
4. 4Option fee. The option fee is non-refundable. If the Tenant buys, it is credited to the purchase price.
5. 5Rent credit. [Amount] of each monthly rent paid on time is credited to the purchase price. Late payments earn no credit.
6. 6Exercise. The Tenant exercises the option by written notice to the Owner before [date]. Closing takes place within [number] days of the notice.
7. 7Repairs. The Tenant handles routine maintenance up to [amount] per repair. The Owner handles structural repairs and major systems.
8. 8Owner obligations. The Owner keeps the mortgage, taxes and insurance current and does not further encumber the Property during the option.
9. 9Default. If the Tenant defaults under the lease and does not cure within [number] days of notice, the option ends and the Owner keeps the fee and credits.
10. 10Assignment. The Tenant may not assign the option without the Owner written consent.
11. 11Recording. Either party may record a memorandum of this option.
12. 12Entire agreement. This agreement and Exhibit A are the entire agreement. Changes must be in writing and signed by both.

Signatures: [Owner name and date] · [Tenant name and date]

Use this template to fill it in and send it to sign from SignSolú.

How to sign a lease option agreement online

Upload a lease option agreement to SignSolú or start from a template. Add each signer with a name and a phone number or email.

Each signer gets a link by WhatsApp or email. On a phone they tap the brown bar at the bottom that says «Sign as …».

They draw their signature once with a finger and press «Sign and Send». Every place in the document that needs it gets filled.

A line next to that button records their consent to sign electronically, with a link to the disclosure.

The signed PDF ends with an audit certificate. It shows each signer, the time, the IP address and a SHA-256 hash of the file.

If the other side sends their own PDF form instead, fill in the PDF form online, add the date and your signature, and download it.

If you record a memorandum of option, the county may ask for a notary on that memorandum. Many counties accept electronic recording.

People also ask

What happens to the option if the owner dies?

The option binds the estate in most cases. The heirs take the property subject to the tenant right, which is one more reason to record the option.

Can the price go up during the option?

Only if the agreement says so, for example by an appraisal at exercise. A fixed price stays fixed.

Can a lease option be used for commercial property?

Yes. Businesses use lease options to occupy a building now and buy it once revenue or financing allows. The terms are usually negotiated in more detail.

What is a fair option fee?

There is no fixed rule. It depends on the price, the option period and the local market, and it is negotiated between owner and tenant.

Is a lease option a good idea?

It can be for a tenant who needs time to qualify for a mortgage and for an owner who wants a committed tenant. It works best with clear terms and a recorded option.

Who pays property taxes in a lease option?

The owner, in most agreements, since the owner holds title until closing.

Can the owner sell to someone else during the option?

Not free of the option, if the option is recorded. A buyer takes the home subject to the tenant right.

Is the option fee refundable?

Usually not. The agreement can say otherwise, for example if the owner cannot deliver clear title.

What happens if the home appraises below the price?

The tenant may have trouble getting a mortgage. Some agreements let the parties renegotiate or use the appraised value.

Common mistakes in a lease option

1. 1No title check. The tenant pays a fee on a home with liens the owner cannot clear.
2. 2Credits not in writing. The tenant thinks rent counts toward the price and the owner does not.
3. 3No recorded option. The owner sells or refinances and the tenant right is hard to enforce.
4. 4A price with no reality check. A price far above market means the tenant will not get a mortgage.
5. 5Unclear repairs. The roof leaks and each side thinks the other pays.

Getting a mortgage at the end

The option only helps if the tenant can buy. Start talking to a lender in the first months, not the last ones. Ask how it treats the option fee and rent credits.

Keep proof of every rent payment, such as bank transfers. Lenders often ask for a payment history to accept rent credits as part of the down payment.

Related templates and guides

• Lease agreement
• Purchase agreement
• Master lease
• Breaking a lease

Sources

• ESIGN Act, 15 U.S.C. 7001, on govinfo.gov