Lease Option (Lease to Own)

I’ve had a couple of buyers ask me recently about using a lease option, or “lease-to-own” agreement to buy a house.  Since I have had some experience with this, decided to post about it.
If you wanted to consider lease-to-own, also known as lease-option, of a property, the most likely candidates are vacant homes that are listed for sale, but have been on the market for a while. If a seller hasn’t been able to attract a buyer, and they are getting tired of supporting an empty house, they may consider doing a lease-option.  

All terms are negotiable, but a typical scenario might be something like this:
List price : $600,000, vacant property, on the market 60+ days
Offer : $10,000 option money, lease of $3000/month, $500 of lease to apply to down payment, purchase price $585,000 to close at end of 12 month lease period.

Advantages to seller :

  • Immediate cash from option money and pre-paid rent.
  • Income to help pay the mortgage during the lease period. 

Risk to seller:

  • Buyer/Tenant may change their mind after living in the house.
  • Buyer may damage the property and it will require rehab before re-marketing.
  • If values decline, the buyer may walk away at the end of the option period.

Advantages to buyer:

  • Can tie up a house today for purchase at a future date, so if value increases would have built-in equity buildup.
  • Less cash required to move in.
  • Part of rent may be applied to purchase (although rent is often market-rate, or more.)
  • Can be good for a buyer who needs to improve credit, complete more time in new job, or save for down payment before buying.

Risks for buyer:

  • If the buyer doesn’t buy at the end of the option period, seller gets to keep option money.
  • If better house comes up, may not be able to jump on it while tied up in the lease

I bought my first house using a lease option, and it worked well for me.  My husband and I were newly-weds with less than 2 years at our jobs, and we didn’t have the required 20% down payment (this was 1978, when 80% loans were the only mortgages available and I don’t think FICO scores were even invented yet.)  We gave the seller $2,000 option money, and agreed to buy the house in one year for $100,000 (market value at that time was closer to $95,000) and we agreed to pay $600/month rent.  At the end of the year, we came up with the other $18,000 of our down payment and bought the house, which appraised for $125,000 at that time.  The interest rates at that time were terrible so we had to take an adjustable at 12.5% because fixed rate loans were 16%.  But that allowed us to become “proud homeowners”!  

Lease options can be a good solution for both buyers or sellers, but they are not without risks. There are many ways to actually structure the transaction to protect both parties, such as recording the option, or opening a long escrow and using an interim occupancy agreement during the lease period. Please call or email me if you are considering doing this and I will help you figure out the right way to go.

 If you have some general questions or comments about this article, please post your comment.
Phone direct : (949) 457-0281


11 responses to “Lease Option (Lease to Own)

  1. Hi Vicki,
    I have a house with a tenant whose paying me 1400.00 a month. My mortgage payment is 2300.00 a month. She has recently mentioned to me that she wants to lease to own. I owe 318k on the house. I would like to do a one year or two year lease option and I want to figure out how to set a price. When she does exercise the purchase I want to cover the 318K plus any expenses and credits. How much should I charge her for an option payment. Could you please give me some advice? Thanks, George

  2. Hi George –

    There are almost unlimited ways to structure it based on the sales value, the length of the lease, etc.

    If your mortgage payment is $2300, do you also have property taxes, insurance and HOA dues that come out of your pocket? Has this been a rental for a while, or was it previously your personal residence? There could be tax issues for you, so you may need to discuss with a tax professional.

    Please give me a call and I’ll try to talk you through some of the considerations.
    (949) 457-0281

  3. Hi Vicki,
    We currently live in a house like everywhere else is depreciating in value with an outrageous mortgage. We were thinking of renting the place out when lease to own was suggested by someone. With the market looking glum for sellers, is it also glum for lease to own situations? Our loan is 500K but house appraises on a website for $411K. What do you think?

  4. Hi Janice –

    The lease option might work, but I have to ask, if you are currently living in the house, why would you do it?

    The rental income will probably not cover your costs to own, and you still need a place to live in yourself. Do you have to leave the area, or have a personal reason that you can’t live in that house any more? If the house is larger than you personally need, have you considered taking in a roommate to help with the carrying costs?

    I also would not be too sure about the actual value being $411K. The automated valuation sites are almost like throwing a dart, and don’t take any upgrades or locational factors into consideration. It’s possible that it is worth more. If you are in Orange County, I can run a quick CMA for you, but if you are somewhere else, I would recommend contacting an experienced and knowledgeable agent in your area for a more accurate evaluation.

  5. Hi Vicki,
    I’ve also purchased a lease to buy home about 6 years ago. But the house is located too far from our jobs(my husband and I). We work at the same company for over 10 years. So we decided to rent our house out and moved back to OC. We’re rental again but will love to do a lease to buy again. We’re current paying $1700 a month for rent and would like to stay around that range. We don’t have $10,000 for deposit on a lease to buy property, but can put down 1st and last. Is the price negotiable? If so, where can I find these property around Orange county? We will like to move asap. Help.

  6. Hi Regina –

    When looking for lease-to-own properties, the most likely ones will be vacant, have been on the market for several months, and have been owned by the current owner for a long time (with substantial equity.) The problem with lease options today is that the market is still declining, so sellers are reluctant to agree to a lease option, because there is a fairly large risk that the buyer will bail out when the option price is higher than the market value in a year.

    Right now, you might be better off using an FHA loan and buying a property that is aggressively priced to sell. You would probably get a better value. The 3% down payment can be a “gift” from a relative, or even through a special grant program from the seller. I’m a big fan of the FHA programs because they are very protective of the buyer’s best interests.

    If you would like to talk about it, please give me a call. I can put you in touch with an FHA mortgage expert who can explain all the various programs and details.

  7. My husband and I are living in a rental and have been here for over 7 years. We hate it here! We would love to buy a house but cannot afford the payments or a down payment that would be needed at this time.
    We are paying about 2300 a month and need at least four bedrooms. My husband makes about 185,000 a year and we have about 25,000 in credit card debt to pay off. I think. My husband has been at his job for about ten years and is a construction superintendent. What do you think of a lease option for us.
    Thanks, Ricki Prather
    PS My husband also is a veteran and we are first time buyers.

  8. Hi Ricki –
    I sent you a separate email, but I think I will be adding a new post to cover more situations where a lease option may be appropriate or not.

  9. Hi Vicki,

    My husband and I are relocating back to Orange County from Seattle. We moved up here and bought a house last year. We plan on leasing it out.

    In the 12-18 we would be looking to find out about properties that are lease to own. We have never done this before so we are not sure how it works.

    We would enough money to place a downpayment on the place, depending on the price of the house.

    Can you send me any information? Also where does one look to find these types of properties?



  10. Hi Vicki~

    I found your post while searching for Lease-Option/Lease to Own information. I think I am getting a handle on how they work. I do have some questions though. When you say that the rent is ‘market based’ does that mean that it is determined by similar homes and their rental costs? Can you still get into a lease-option and faithfully pay your rent every month and your landlord be in a negative cash-flow situation?

    We currently pay $1100 per month and we are coming up for renewal on our contract. The owner of our home has suggested he’d like to sell as our payment to him doesn’t cover his payment. He says he is willing to work out a lease-option with us, but has not really committed to any numbers or given more info right now. We do know that his payment is closer to $1500, which we could not afford if he needed that much to convert to a lease-option. Can we work a deal that would be beneficial to us both?

    Thanks for your help and advice.


  11. Hi Vicki —

    I’m a widower who just needs to get out of Los Angeles. I’m currently looking around in Oregon because it appears that one can get a better house — but then there’s the weather. I came across what seems like a nice house in the Central California Coast area for lease or with lease/option. This area is my number one choice of all places in the world to live.

    So here’s the deal: my FICO score is over 800 — I could come up with a pretty substantial down — although I’m not very wealthy (this stock market is killing my net worth).

    I’m writing a check for about $2100/month for rent in LA, these people are asking about $2250 with the option — I’ve been in a mostly retirement mode since my wife’s death — just stunned. Will resume work soon, I hope. I live frugally, but money does wane when you don’t work.

    So,I’m not sure how the bank would look at me as a homebuyer, although I could verify assets and dividend and small pension income. Anyway, you get the idea. What do you think?


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s