First, as you're focusing on, is the issue of price. That's a bit more difficult when you're dealing with a lease-option because you're not talking about today's price, but the price in a year, or two, or three--whatever the length of the option is.
Now, ideally (for you), the option price should be very close to today's fair market value. But in a situation where there's a reasonable possibility of higher prices in a few years, the seller is likely to want something above today's market value. For example, assume that the fair market value of a property today is $100,000. And assume it's a 3 year option. And assume a reasonable projection of the increase in value of a property is 5% per year. In that case, the home will be worth about $117,000 in 3 years. So an option price after 3 years of $110,000 wouldn't be unusual, even though it's more than the house is worth today.
How do you protect yourself? First, you have to know what the house is worth today. Have a Realtor (not the seller) do a CMA on the property. The next part is guesswork. How much, reasonably, might the property's value go up over the course of the option. You'd factor that it. Now you'll have a better idea of whether--when you exercise the option, you're likely to be overpaying.
You also have to factor in any rent credits you get. Let's say fair market rent is $600. You'd be paying $700, but getting $200 a month credited to the purchase. What you want to find is how much the rent credit is reducing your rent below fair market rent. Sometimes it's nothing. Sometimes it's a lot. In this case, you're paying $700 but getting a $200 a month rent credit . . . so your effective rent is really $500. That's $100 under fair market rent if you exercise your option. That's $100 a month benefit to you, or $1,200 a year, or $3,600 over the course of 3 years. Using our example above, if the option price of the property is $110,000, that really brings your true effective price down to $106,400.
So, what may appear to be overpriced today really can work out to be a good value in the future when you take into account appreciation (if there is any) and rent credits.
I'm not a lawyer, so what follows is not legal advice. For that, you need a lawyer. However . . .
Now, to protect yourself further, you want a provision in the option in case the house isn't worth (doesn't appraise for) $110,000 in 3 years (to keep using our example). There are a couple of ways to do this. You can include something in the option providing for an extension of the option for another year or two (to give it time for the value to go up). Or, if the seller has sufficient equity, the option can provide that the option price will be the lower of $110,000 or the appraisal at time of exercise of option. That way, suppose it only appraises for $107,000. Then, with that clause, the option price would be lowered to $107,000, so you wouldn't be overpaying.
You also want to make sure that the seller is continuing to make mortgage payments on the property. There are a lot of different ways to do that. For example, you can agree to make payments to a 3rd party, whose responsibility it is to make the mortgage payments (and to send any remainder to the seller). You can set it up as a land trust, with the trustee making the payments. Or, at a minimum, have the seller sign an "Authorization to Release" which will give you the same rights as the owner to check with the mortgage holder to make sure the payments are being made.
In a lease-option, you can't deduct the interest and taxes on the mortgage. You're a tenant. But using the proper land trust structure, you can. (You'd be the resident beneficiary in the trust. As one of the beneficiaries of the trust, you'd be entitled to the deductions. See http://www.landtrust.net )
Understand that in most lease-option arrangements if you do not exercise the option you lose your upfront option fee plus rent credits. That's negotiable, but usually set up that way. And understand that not all lease-options end in purchases.
One other thing you should do is start working with a good mortgage broker to make sure that you'll be qualified to purchase at the end of the option period. Right now, a mortgage broker can tell you how your credit looks and about how long (with current market conditions at least) it'd take for you to qualify for a mortgage large enough to purchase the property. You should do that right away. And maybe the mortgage broker will tell you that there's no way, even in 3 years, that you'd qualify for a mortgage to buy that $100,000 property. You need to know those things now, not in three years.
Those are just a few things to be aware of. Make sure you have a good real estate lawyer helping you--one who knows and understands lease-options.