How to Structure a Lease-to-Own Agreement

by Pat O'Connor; Updated September 26, 2017
A lease-to-own agreement allows a tenant to test drive a house before buying it.

A lease-to-own agreement consists of two contracts; a lease agreement and an option contract. An option contract is unilateral and binding only on the property owner. The tenant offers to buy a property at a future date, for a stated amount of money and the seller agrees not to accept other offers while the lease is in effect. The tenant is entitled to walk away from the deal. These contracts are complicated and it is advisable to retain the services of an attorney.

Step 1

Determine the future sale price. This isn't an easy task in an uncertain real estate market. Current fair market value won't likely be accepted if property values are rising. If property values are declining, the tenant will be reluctant to make an offer that reflects current prices. Options to buy are frequently utilized by individuals who can't currently obtain a mortgage loan, but hope to do so in the future.

Step 2

Determine payments. For an option to be legal, there must be a significant option consideration, either in the form of a tenant's upfront payment of 1-to-5 percent of the sale price, or a higher than market value rent, or both. Check state law to determine if a basic, legally-sufficient option consideration is defined. It may be possible to apply these funds toward the down payment and closing costs if the option is written that way and the lender agrees.

Step 3

Determine term. An option is typically a short term contract of 1-to-3 years. The seller agrees not to sell the property during this time to anyone other than the person holding the option. The seller benefits by having a tenant who takes care of the property. The tenant benefits by trying out the house before buying while gaining time to build up savings and credit. Most options, however, are never exercised.

Step 4

Determine if payments are refundable. If the option expires and you are unable to close the deal, the contract should spell out if money can be refunded. It is uncommon to have a financing contingency that refunds money if you can't obtain a mortgage loan. Hire an attorney to write the option. Most real estate agents aren't experts in dealing with option contracts and the pre-printed forms most use may not be the best fit for you.

About the Author

Pat O'Connor is the broker/owner of The Veritas Real Estate Group in Coral Springs, Fla. She holds a M.A. in psychology from the University of South Carolina. O'Connor has been writing real estate and loan origination textbooks, as well as developing online courses, since 2005. Her latest publication is the kindle ebook, "The SAFE Mortgage Loan Originator National Exam Study Guide."

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