Lease options are agreements that give tenants an option to purchase a property during or at the end of their leasing period. These agreements allow investors to sell rental properties to their tenants without entering into a new agreement. Further, lease options enable potential buyers to live in a property temporarily before deciding to purchase it. Lease options grant additional protections and flexibility for buyers and sellers.
The Basics of Lease Options
Lease options allow a buyer to live in a property before moving forward with a purchase. They prevent the seller from listing the property and thereby selling it out from under the renter. The option to acquire usually activates at the end of the lease period. The lease option also allows the renter/buyer to forfeit the option to buy. Other common elements to this type of agreement include a fixed purchase price at the start of the lease option – the purchase price does not change based on swings in the market (up and down) and a premium on top of the purchase price.
The premium might be higher monthly rental payments (above market price), a fixed percentage tacked onto the purchase price, or another pricing vehicle. The premium and sometimes the monthly rental payments, are added into the down payment, constituting a part of the overall purchase price.
Using Lease Options to Invest
Lease options are valuable tools to invest in real estate. The lease option allows investors to transition renters to owners in the same agreement seamlessly. The owner avoids floating a rental property for months without a tenant and saves on the cost of marketing and selling a property (cleaning the property, staging it, marketing, etc.).
Another investment strategy is to enter into an agreement with the current tenant to allow a subletter. In this scenario, the tenant and property owner agree to low rent. In exchange, the tenant and sublessor sign an agreement for a premium monthly rent in addition to the option to buy. The primary tenant and owner split the monthly rent, and the owner can cycle a series of possible buyers into the property if necessary.
With this type of agreement, sellers surrender some flexibility in selling their property – for example, fixed prices and locked-in buyer – in exchange for certainty and value, such as guaranteed rental payments for a fixed term, a premium on the price, and an identified buyer.