Module 6: Advanced Strategies

Lease Options

Master rent-to-own strategies to solve seller problems and create win-win deals when traditional sales won't work

What is a Lease Option?

A lease option (also called rent-to-own) combines a lease agreement with an option to purchase. The tenant rents the property for a set period with the right (but not obligation) to buy it at a predetermined price.

This creates a powerful win-win: sellers get monthly income and a future sale, while buyers get time to improve credit, save money, or test the property before committing.

Two Components of a Lease Option

1. Lease Agreement

Standard rental contract terms:

  • Monthly rent amount
  • Lease duration (typically 1-3 years)
  • Security deposit
  • Maintenance responsibilities
  • Rules and conditions

2. Option to Purchase

The right to buy at a future date:

  • Locked purchase price (set today)
  • Option fee (non-refundable upfront payment)
  • Option period (deadline to exercise)
  • Rent credits (portion of rent toward down payment)
  • Terms if option isn't exercised

When to Use Lease Options

Property Won't Sell Traditionally

Market is slow, property is dated, or asking price is too high. Lease option gives seller monthly income while waiting for right buyer.

Buyer Has Credit Issues

Tenant-buyer can't qualify for financing now but will in 1-2 years. They get time to repair credit and build down payment through rent credits.

Seller Needs Monthly Income

Seller is retired or needs cash flow. Rather than a lump sum sale, they prefer monthly rent checks plus a future sale.

Seller Has Little to No Equity

If the seller owes close to what it's worth, a lease option lets them keep making mortgage payments from tenant's rent until property appreciates enough to sell.

Lease Option Structure: Step-by-Step

1

Negotiate with Seller

Agree on monthly rent, purchase price, option period, and option fee. Example: $1,500/month rent, $200K purchase price, 2-year option, $5K option fee.

2

Sign Lease and Option Agreements

Execute two separate documents: one for the lease terms, another for the purchase option. Keep them legally separate.

3

Pay Option Fee

Tenant pays the non-refundable option fee upfront. This locks in their right to purchase at the agreed price. If they don't buy, seller keeps this fee.

4

Tenant Pays Monthly Rent

Tenant lives in property and pays monthly rent. Often, a portion of rent ($200-$500/month) is credited toward down payment if they exercise option.

5

Option Exercised or Expires

If exercised: Tenant buys at locked price, using option fee + rent credits toward down payment.
If not exercised: Lease ends, tenant moves out, seller keeps option fee and property.

Example Lease Option Deal

Property Value: $200,000
Monthly Rent: $1,600/month
Rent Credit: $300/month toward purchase
Option Fee: $5,000 (non-refundable)
Purchase Price (locked): $210,000
Option Period: 24 months

If Tenant Exercises Option:

Down Payment Credits: $5,000 (option fee) + $7,200 (24 months × $300 rent credit) = $12,200 toward purchase

Tenant needs to secure financing for $210,000 purchase, then closing happens with credits applied.

Critical Warnings

  • Record the Option: File the option agreement with county records to protect tenant's rights and prevent seller from selling to someone else.
  • Separate Agreements: Keep lease and option as two separate documents for legal and tax reasons.
  • Clear Maintenance Terms: Define who handles repairs. Typically tenant handles minor, seller handles major (HVAC, roof, foundation).
  • Use an Attorney: Lease options have complex legal implications. Always have proper contracts drafted by real estate attorney in your state.
  • Due-on-Sale Clause: If property has a mortgage, check if lease option triggers due-on-sale clause (rare but possible).