Leasing is a fairly popular form of living arrangement since it basically involves renting over a pre-set period of time, usually 3, 6, or 12 months at a time. Leases provide lower rates than a month by month rent. However, when looking to lease, one will often come across the “Lease Option.” Lease options work essentially the same way as standard leases, but in this case, you would have a choice to purchase the property at a future date.
Here’s the thing about an option — it’s an option. It may be an interesting offer for some renters, but others will want to pass it up. The option does not have to be taken, since there is a fee required to purchase the option. The amount of this fee may vary, but in any case, this is an up-front fee that gets paid when accepting terms of the lease. Lease options are typically offered to consumers in the event of a bear market, as property owners usually seize the day when the real estate market is hot, and decide to sell.
There are some definite advantages and disadvantages when it comes to a lease option. First, the bad news — rarely is a lease option exercised, which is a fancy way of saying “money has just been squandered.” There are a lot of individuals who pay up, think they have a good chance of buying later, only to realize they aren’t eligible for a mortgage after all. When this happens, the money paid to purchase the option is lost and you will be wondering what you could have possible been thinking when you entered into the agreement.
One of the most frequent uses of the lease option would be in real estate investment. In this example, a person investing in real estate would attempt to “flip” a home in due time, then realize profit. They find the lease option to be very attractive because it allows them to secure the home without dedicating significant cash resources to the deal. Once they purchase the option, they then start hunting for a buyer that will pay more than the seller is looking for in the original sale. If the investor can pull it off, they exercise the right to buy and immediately sell to the third party. In many cases, the two transactions will happen at the same time! So now you have one happy investor — and one original seller desperately hiding the tears in his/her eyes.
Lease options are like most anything in life, as they have a good side and a bad side. For investors, it makes sense in many situations since it frees up cash flow. But it is hardly ever the best thing to do for individuals who want a permanent residence for themselves and their family.