How does a lease option work?

Asked by Cecily Jones, 92672 Mon Oct 4, 2010

Hello Trulia- my husband I didn't qualify for a mortgage this year because our 2008 tax return shows too many deductions and too little income. Our mortgage broker said we will definitely qualify next year after we file our 2010 tax return with more income b/c that averages will average with 2009, which is good. We want to buy a house, and are ok with waiting until next year, but a really great house just popped up on the MLS for a great price. We were wondering how a lease option works, the idea being we lease it for 3-6 months and then buy it. Any advice would be appreciated- thank you!!

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Constantine K.’s answer
Constantine…, , San Diego, CA
Mon Oct 4, 2010
Lease options do work if structured properly. They are uncommon, though, since the seller must be ok with putting off the sale of their property and risking that in 6-9 months you still may not qualify for financing. If the seller is ok with doing a lease option, I suggest it!
Best of Luck in your endeavors!
0 votes
Emily Knell, Agent, Huntington Beach, CA
Mon Oct 4, 2010
Don't do a lease option: Get into the house on a REGULAR lease & make the owner put a clause in the lease stating that "Should owner decide to sell in 6mos (or fill in the blank) YOU have the FIRST RIGHT OF REFUSAL"

Meaning you have 1st dibs with offering to purchase. This way you don't have to mess around with possibly LOSING "Option Money".
562-430-3053 cell
1 vote
Greg Semos, , Mission Viejo, CA
Wed Oct 6, 2010
Hi Cecily

Lease with Option is one of the questions I often get from first time buyers with limited down payments. They can work, but I seldom recommend them.

First, the buyers is very much at risk from several directions: if the seller defaults on their mortgage and the house is foreclosed on the buyer is just plain out. What ever they have paid for the option (money down or increased rent) is lost AND they have no place to live; and you are absolutely at the mercy of the market during the option period. If the market goes down then you pay the higher price, and with the lower value you may not be able to finance the purchase.

Second, you are counting on being qualified next year. Good intentions aside, if interest rates go up, or prices go down you may not be able to qualify. If something happens and your income is temporarily reduced you may not qualify. You may not get the tax return you were counting on, you may have a baby and be on maternity leave. It's really an unknown.

Finally, there are any number of "scams" that have been very popular in this area.

I am not saying that you shouldn't do a lease option, just that it is not nearly as rosy as some of the answers.

Good luck,

Greg Semos
Regency Real Estate
949 632-4883
0 votes
Don Tepper, Agent, Burke, VA
Mon Oct 4, 2010
Some basically OK answers already. A few points, though:

Lease-options aren't uncommon or rare. They're pretty common, though some agents don't see them all that often.

Have your lease-option period go for as long as possible, even if you do think you'll be in a position to buy in 3-6 months. That's to protect yourself.

Try to have your lease-option all in one primary document. That's to your advantage. On the other hand, it's to the seller's advantage to have two absolutely separate documents: a lease and an option. A lawyer familiar with lease-options can explain why.

There are various things you can do to prevent the owner from selling the property while you have the option on it. Your lawyer can advise you, but one of the more common is filing a "Notice of Option" with your Recorder of Deeds office. That'll "cloud the title."

I'm pleased that a number of previous comments point out that everything is negotiable. That includes the amount of your option fee, the amount/percentage (if any) of your rent that's credited to your purchase price, and so on. That's important to keep in mind so that you and the seller both end up in a win-win situation.

Hope that helps.
0 votes
Leslie Eskil…, Agent, Mission Viejo, CA
Mon Oct 4, 2010
Hi Cecily -
Lots of good advice here! In addition, do you know what type of sale the great house that just popped up on the MLS is? If it is a Short Sale or an REO listing, a lease option will probably not work. In the case of a Short Sale, the seller is trying to sell their home before it goes to foreclosure - so they want it sold as quickly as possible. And most banks will not consider a lease for any period of time. Somewhat the same with an REO - the bank wants the property sold and off of their books.
I would make sure you are concentrating on Standard Sales - sellers who have equity in their home, and can work with you to structure a lease option. Currently, there are 114 Single Family detached homes available in San Clement that are not Short Sales or REO - ranging in price from $440K to $5.8M.
Hope this helps. Best of luck to you!

Leslie Eskildsen, Realtor
Altera Real Estate
As seen in the Orange County Register:
0 votes
Willy Olsen, , Claremont, CA
Mon Oct 4, 2010
Lease Option aka Lease Purchase Option, Lease Purchase, Purchase Option, Rent to Own, etc.
Seller will take an Option Deposit which can be $2,000 to as high as $10,000 that is non-refundable should you not exercise your right to purchase.
It's not financially beneficial for an investor/owner to take a lease for 3 to 6 months. Most LPO's are 24 to 36 months. The reason for this is for the owner to make a few bucks during the lease period and for the buyer/tenant to be able to qualify for a loan. LPO contracts must have a lease rate and a purchase price. Most owners figure a future value of the property that it will be sold to you at, subject to an appraisal at the time when you plan to get a loan to buy the home. Expect to pay a monthly rental/lease rate higher than typical. Some sellers will take a percentage of that rent that can be put towards the down payment for a loan in an escrow or savings account for you. But some lenders will not look at that money as your down payment for a loan since the account is not in your name.
The main thing is to read over the contract carefully. Know the Option Deposit amount, rental/lease rate, duration of the lease and date to exercise your option, future purchase amount, and will any of the rental/lease funds go towards the down payment funds for a loan. If you don't understand the contract, have a real estate lawyer go over it with you and advise you if needed.
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Duane Burns, Agent, Newport Beach, CA
Mon Oct 4, 2010
Hi Cecily,

A lease with option to buy is simply when you lease the property for a given period of time with an option to purchase the property at the end of the lease. Typically, you complete a full purchase agreement and deposit your “option” money into escrow. When you execute your purchase agreement, the “option” money and any other payments such as a percentage of your monthly payments, are counted toward the purchase price, etc. If you fail to complete the purchase, typically all or part of your “option” money is forfeited to the seller. These are all negotiable terms.
0 votes
Bonnie Hart, Agent, Mission Viejo, CA
Mon Oct 4, 2010
Hi Cecily,

I am doing one now as we speak. It is a win win situation because my buyer can not qualify for the loan until next year - also this particular house has been on the market for awhile and the seller was going to lease it anyway. So we put together the terms, deposit, and the amount she is going to purchase it for. Also there is a portion of the payment going towards the purchase and part of the deposit as well.

Also you have to consider the repairs necessary so that you know what you are buying. I would suggest doing a home inspection and having the seller do the repairs or negotiate that. This one had a lot of termite damage so we requested tenting.

Also check out this website for more information:…
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Michael Emer…, Agent, Mission Viejo, CA
Mon Oct 4, 2010
Cecily, first I recommend a second opinion from another mortgage source. I have recommendations. Rates are too good right now to pass up, if you actually have good income today, a down payment, good credit and have found a wonderful house for a great price.

I'd have to see exactly what the situation is with this MLS opportunity you saw. But here's the gist of a lease option. This basically means you are leasing or renting a property with an option to buy it at a future date. The future price of the property should be fixed at the time the lease-option is signed. There are lots of other variables that can be looked at too. Let me know if I can help.
0 votes
Raquel Unger, Agent, Irvine, CA
Mon Oct 4, 2010
If it is stated in the Multiple Listing Service or your agent discusses it with the listing agent and the seller agrees to the lease with an option to own.

Every seller has different terms..some terms are lease for a year and 1/2 your rent money will be applied to the purchase price, your closing costs and or repairs. Some sellers are less generous than others with terms.

If there is a home you want to purchase and the seller does not agree to these terms ..maybe you can get a

Have you seen the home...if not I will be more than happy to show you the property...or call and try and negotiate terms for you.

Please call me with any other questions. 949 873 7003 or 760 473 5353
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Lisa McBride, Agent, Bean Station, TN
Mon Oct 4, 2010
A lease option can be a really good thing or a really bad thing. It all depends on how and who prepares the lease. You should have an attorney look over any lease option to make sure you are protected. I would always advise anyone that is considering a lease option to speak with their attorney first.
Having said that, the good side of a lease option is IT can happen now and you dont have to wait until you file your tax returns. In other words you dont have to put your life on hold. If you find someone that is willing to do this even for a short term it could be a win win for everybody. You can get the home you want and they can get some income or debt relief on a home they no longer need. A lease option is simply what it says it is. You lease the property for X amount of time and at the end of that time you have the option to purchase the home at the already agreed upon price. Some people carry their lease option out for several years and then purchase the property at the end of that time for something like $1.00
On thing to always look for is the terms and conditions. You want to make sure if you are doing one for several years that the owner of the property cant simply come and evict you if you are only a few days late with your payment. The usualy time in my area for someone to be considered in default is between 45-60 days. Never sign a lease/option that only give you 4 or 5 days and if you dont pay you can be evicted.
Always make sure you keep insurance on your property and make sure the owner or lessor is keeping insurance on their portion of the property. If the owner of the property is charging you for the insurance make sure you are an additional insured on the policy.
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