Definition
A lease-option lets tenants rent with an option (but no obligation) to purchase at a predetermined price within a specified period. A portion of rent is typically credited toward the down payment. It lets renters test-drive the home before committing to purchase.
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Lease-options allow renters to test a property before committing to purchase, and sellers to eventually convert rental income to a sale. A percentage of monthly rent (typically 10-20%) is credited toward the purchase option price. The option period is usually 2-5 years, allowing the tenant time to improve credit and save for a down payment. At the end of the option period, the tenant can exercise the option to buy at the predetermined price, walk away, or renegotiate. Lease-options protect sellers (they retain the property if the tenant doesn't exercise the option) while giving buyers time to qualify for financing.
Pro Tip
Lease-options help buyers improve credit and save for down payments; ensure the option price is reasonable based on current market value.
Example
A tenant rents a home for $2,000 monthly with a lease-option; $300 of the rent ($3,600 annually) is credited toward an $300,000 purchase option price exercisable within 3 years.