A lease option is a typical lease with the right to buy the property within a specific period of time.
Unlike a sales contract or a purchase agreement where both parties must perform, an option only requires one person to perform, for example, a seller must sell to either the person that has the option to buy or to another party.
The person with the option to buy only has a right to purchase the property but is not required to make the purchase.
Lease Option Example
Let’s say you found a seller that is trying to sell their home, but because they didn’t have enough equity in their home they had difficulty selling. This could be an opportunity for the seller to ease their financial strain.
You work out a deal with the seller where you will lease out the home for five years with the option to buy it at that time. You guarantee payments and take care of most of the maintenance. You promise to pay the seller $1,000 a month and in return, the seller promises to sell you the home within five years. The seller may not be able to make payments when they move, so they need your help and understand you’re an investor. The seller allows you to sublet the property and sell the home without their permission and knows you will make a profit.
There are a few options you can do at the end of a lease term.
You could buy the home or help or help the seller sell the property. You can’t actually sell the property since you don’t own it. You just have the option to purchase it.
A great resource on the subject of Lease Options is Kevin Amolsch’s book, 45 Day Investor.