A lease-option contract combines a basic lease contract with an option to purchase contract. The arrangement begins with the tenant/buyer paying the landlord/seller a nonrefundable option amount, which gives the tenant/buyer the exclusive right, or option, to buy the property at an agreed option price any time during the lease term. The option payment would be applied toward the purchase price of the property if the tenant/buyer exercises the option and buys the property during the lease term.

Concurrently with the option contract, the tenant/buyer leases the property from the landlord/seller for a fixed period, usually from 12 to 36 months, and pays the landlord/seller monthly rent, which is typically above fair market rent for the property. An agreed-upon portion of that monthly rent, which is usually the difference between rent paid and fair market rent for the property, is often applied toward the purchase price of the property if the tenant/buyer exercises the option.

If the tenant/buyer fails to exercise the option to purchase within the option period, the tenant/buyer forfeits all option and lease payments made.

The terms of a lease-option are much more important and complex than a purchase. Aside from the sales price, you have to negotiate option consideration, rent credits, which party will pay for interim expenses like repairs and closing costs, inspection and contingency issues, and possibly future appreciation or depreciation issues. Also, the agreement must be structured so the lender will accept it. However, when structured properly, both the buyer and seller can reap powerful benefits from a lease-option arrangement. Thus, you should always use an experienced real estate attorney to draft your lease-option documents.

Brian Collins has experience in numerous lease-option transactions, both personally and professionally. Contact Collins Law Corporation to have Mr. Collins put his expertise to work for your lease-option transaction.