Not to be confused with a “Sale-Lease-Back”, which is when the owner sells their property, and remains on as the tenant, a “Lease-With-Option”, also commonly known as a “Lease Option”, is a legal agreement, negotiated between the owner and tenant which gives the tenant the right to purchase the property under the specified terms of that agreement. Countless descriptions can be found giving very specific terms of how a Lease Option is typically structured, but the bottom-line is that the agreement is whatever the two parties agree upon. It generally will have an upfront, none-refundable “Option Fee” for the tenant to “own” this privilege, how long the Option will remain in-place before needing to be exercised or it expires, how much, if any, of the monthly rent payments will be applied towards the ultimate purchase price, and numerous other factors which typically go into a property transfer.
When deciding on whether to enter into a Lease Option, both parties should consider what they feel the subject property will be worth to them in a specified period of time. Having a crystal ball for such vision would be a huge advantage, but most of us do not. Therefore, it gets down to what each party desires from this property, and how much risk they are willing to shoulder.
It is important to understand the value of the tenant “owning” a first option to purchase the property under predetermined terms. The owner needs to consider the potential cost given up to the tenant by such terms. Therefore, do not enter into a Lease Option lightly. It can be good for each, but can also come at a high cost to one of the parties if the future does not play out as expected.