Abbreviated Form of the Term
Lease With Option to Purchase
A lease option (or lease purchase) is the abbreviated form of the appropriate term lease with option to purchase. It is a type of contract used in residential real estate. The contract is typically between two parties: the tenant (also called the lessee), who will occupy a house or apartment, and the landlord (lessor), who owns the property.
During the term of the lease option, the tenant pays credit to the landlord toward the value of the property, and in exchange is permitted to occupy the property. At the end of the contract, the tenant has the option to purchase the property outright; the tenant would typically obtain the money to do this using a mortgage. In exchange for this option, the tenant may be required to pay extra money to the landlord, in excess of usual market rent however this is not always a requirement.
Excess credit may also be applied towards the eventual purchase of the property, or towards the down payment for a mortgage. In that case, the lease option works as an automatic savings plan for the tenant. This down payment is called "option consideration fee"; in the arena of lease option purchasing this is a fee charged for the right to purchase the property.
Lease options are often used by tenants with a poor or limited credit history, who would not qualify for a typical mortgage or investors who have exhausted their credit. The lease option may carry less risk for the landlord than a mortgage would for the lender. In the event of non-payment, it may be possible to remove the tenants through eviction, which is likely to be cheaper than foreclosure on a mortgaged property. The lease option may also require less money up front, while a mortgage might require a substantial down payment from the tenant.
If the tenant does not exercise the option to purchase the property at the end of the lease, then the monies that the tenant paid in addition to the market rental rate for this option are retained by the owner. This might occur if the tenant no longer wishes to purchase the property, or if the tenant wishes to purchase the property but is unable to obtain the financing required to do so. Some forms of lease option have been criticized as predatory, if a lease option is sold to a tenant who cannot realistically expect to ever exercise the option.