How to Set Up a Lease with Option to Purchase Residential Property


Related Articles

Despite difficult economic times, there are still people looking to buy a home. On the other hand, because of difficult economic times, many people are finding it harder to qualify for a mortgage, or they just don't have the money for the downpayment or closing costs on a house. They also might not be sure they want to buy a home, or they are unfamiliar with a new city or area, and want to try it out for a while. Likewise, because there is so much residential property on the market right now, owners in many areas are having a tough time finding qualified buyers for their homes. One option that may benefit both parties, is a "Lease with Option to Purchase Agreement." This is NOT a "Lease Purchase Agreement." Despite what some others may have said, these are two different animals. The Lease Purchase Agreement requires two documents and is basically a sale that will close sometime in the distant future, maybe a year or so down the line. It is a binding sales agreement once it is signed. The Lease with Option Agreement is not a sale of property. It is a lease with a non-binding option for both parties to enter into a purchase agreement sometime down the road. Please read this article for more of the details.

The first step is to find a home with lease with option to purchase possibilities. Check with realtors in your area and even homeowners that have their homes for sale by owner. Even if a residential property is for sale, the owners may agree to a Lease/Option, just to have something in their hand. Also some of the online property search websites will have lease/options listed. You might also convert a rental property agreement to a lease/option.

Now you have located the home you want, the next step is the agreement. Whether you are the Tenant/Optioner, or the Landlord/Optionee, it is important that everything be in writing. In contract law, if it isn't in writing, it basically didn't happen. Remember, this is a residential rental or lease agreement with an addendum. One document. You can get forms off the internet, through business supply stores, or places like What is important here is what is in the agreement. All states have landlord tenant laws and those apply here.

The Lease Option addendum to your lease should, at a minimum, set out the following: length of option (a year is not uncommon); the provision that any breach of the lease will lead to termination of the option (that includes, of course, failure to pay rent on time; how the sales price will be computed if the option is exercise (e.g. fair market value as determined by an appraisal at the time the option is exercised); how soon before the option period ends does notice of exercise need to be made and how (e.g. 90 days before and in writing); that the property is sold "as is" at the time option is exercised; time line of closing after notice of exercise of option; and what is an isn't refundable in case the option is not exercised and the lease ends (security deposit for lease if governed by landlord tenant law and must be refunded with certain exceptions but the option fee is negotiable.)

More about the option fee or rental payment credit. Most parties to a residential property lease with option to purchase agreement reach an agreement on whether any of the rent will go toward a downpayment on the house. This is negotiable. What usually isn't negotiable, is that the tenant put down an option fee in exchange for the landlord, or owner, of the property keeping the house off of the market for the length of the option. The amount is negotiable and is usually nonrefundable if the option is not exercised. It is often, however, creditable for when the option on the home is exercised.


  • Not a bad idea for the tenant/optioner to make sure there is a provision to get back the option fee if the landlord can't, or won't, fulfill their end of the bargain, including if the property is foreclosed on.


  • Remember the purchase is optional. Nothing in this agreement binds the tenant to buy, as opposed to a Lease/Purchase Agreement.
  • If you are using a Realtor, they should have the documents for this.

About the Author

This article was created by a professional writer and edited by experienced copy editors, both qualified members of the Demand Media Studios community. All articles go through an editorial process that includes subject matter guidelines, plagiarism review, fact-checking, and other steps in an effort to provide reliable information.

Photo Credits