Lease vs. Option
There are really two concepts.
Lease
The tenant pays rent and occupies the property.
Option
The tenant receives the contractual right to purchase under specified terms.
Option Fee
The buyer/tenant may pay an upfront option consideration. The contract must explain: Is it refundable? Is it credited toward price? When is it forfeited? What happens if the option isn't exercised?
Purchase Price
Some agreements establish the purchase price upfront. Others define a formula or future valuation process. Each approach creates different risks.
Example
Current value
$450,000
Lease
$2,400 / month
Option period
24 months
Option purchase price
$475,000
The buyer gets two years to decide whether to exercise. If market value reaches $525,000, the option can be valuable. If market value falls to $420,000, the buyer may decide not to exercise, depending on the contract.
Does Rent Build Equity?
Not automatically. This is a huge misunderstanding.
Ordinary rent is rent.
Unless the contract specifically provides a rent credit toward purchase.
Nevada Writing Requirement
Nevada requires contracts for the sale of land and leases longer than one year to be in writing to be enforceable under the statute of frauds.
No handshake deals.
A lease-option involving real property should never be based on handshake terms.
Existing Mortgage Warning
A lease with an option to purchase can also create due-on-sale concerns depending on the existing loan.
Federal due-on-sale law protects certain leases of three years or less only when they do not contain an option to purchase. That distinction is very important.
Buyer Risks
- Lose option fee
- Purchase price becomes unfavorable
- Credit still not repaired
- Financing still unavailable
- Seller defaults on underlying mortgage
- Taxes or HOA become delinquent
- Property deteriorates
Seller Risks
- Market rises dramatically
- Buyer exercises at lower locked price
- Tenant disputes contract
- Existing lender issue
- Maintenance disputes
- Option clouds future sale
Why Buyers Consider a Lease Option
A buyer may want:
- Time to improve financing
- Time before relocation
- Opportunity to lock in purchase rights
- A path toward ownership
Why Sellers Consider It
Potentially:
- Rental income
- Future buyer
- Option consideration
- Alternative disposition strategy
Don't Assume Rent Becomes Down Payment
Only the written agreement controls whether any rent or other payment receives purchase credit.
The Biggest Buyer Risk
Paying money toward a future purchase without understanding:
- Financing deadline
- Purchase price
- Option expiration
- Maintenance obligations
- What happens if financing fails
Use an Attorney
Lease-option agreements have substantial legal consequences.
Lisa can facilitate the real estate discussion, but legal documents should receive appropriate professional review.
How Lisa Helps
Lisa can help evaluate current value, potential value, market rent, comparable properties, and practical purchase terms.
Looking for alternatives to an immediate traditional purchase? Lisa can help explore properties and negotiations while the right professionals structure the agreement.
