Leasing with the Option to Buy

Real Estate

How Does Leasing with the Option to Buy a Home Work?

Another alternative to buying a home can be lease to own.  Leasing with an option to buy is when a renting tenant signs an agreement with a landlord stating that the tenant can buy the property at the end of a prearranged time period. The owner is obligated to sell at the option price, but the tenant is not obligated to buy. The tenant can buy the property only if the landlord exercises the option.

The lease agreement should have a clause that terminates the option to buy if the tenant in any way violates the lease or gets evicted before closing the agreement to purchase.

Usually, purchase price is set out in the original lease-option agreement – in other words, the purchase price is set according to today’s market, not in the future when the option may be exercised.

An option to buy doesn’t give the tenant legal title to the real estate. The tenant becomes a purchaser only upon exercise of the option, at which time the landlord-tenant relationship ceases and the option becomes an absolute and binding contract of sale.

A unique feature of the lease-option is the rent credit. The tenant usually pays above-market rent for the property, but a (nonrefundable) portion is credited toward the purchase price if the buyer decides to exercise the purchase option. In NJ most owners will require a non refundable deposit upfront for this option.  It's important that a tenant is mortgage ready to purchase the home prior to the end of the lease term.   The deposit can be larger than a security deposit since the lease is based on different terms upon end of lease.  Individuals that have poor credit will need to work with a professional to become mortgage ready which is required.