Does a lease option really benefit a landlord?
A lease option is an agreement between a landlord/seller and a tenant/buyer where they simultaneously execute a lease agreement for a specific term, with the agreement giving the tenant an option to purchase the property, but not the obligation to do so. The term of the option need not be the same as the term of the lease, although generally the option period will be less than or equal to the lease period. For example, the tenant as a future buyer agrees to lease the property for one year and has the option to purchase the property by a specified date before the end of that year.
A lease option may benefit some landlords. In a lease option agreement:
- A landlord may be able to generate extra income because a lease option is often written with an above market monthly rent with the excess usually applied to the option purchase price.
- An option fee, usually a non-refundable fee, is paid by the tenant to the landlord as a consideration for the option to purchase the real property at a specified future date. If a tenant does not exercise his right to purchase the property, the tenant is not entitled to a refund of excess rent or option fee.
- Brokerage commissions and other marketing costs related to a future sale are usually avoided.
- Because the tenant expects to end up owning the property, the tenant may take better care of the property.
- If the market declines, the landlord as the seller may be able to sell at a higher-than-market price if the tenant as the buyer still wants the property.
- In many cases, the tenant will not exercise the lease option because the tenant can’t qualify for the mortgage loan or does not have the necessary funds to close the sale. If the landlord obtained premium rent, had a good tenant, and it was not important that the property be sold, the landlord could be ahead of the game.