BROWSE

Lease Option

Definition

A lease option is a type of contract used in both residential and commercial real estate. In a lease-option, a property owner and tenant agree that, at the end of a specified rental period for a given property, the renter has the option of purchasing the property.

What is 'Lease Option '

An agreement that gives a renter the choice to purchase a property during or at the end of the rental period. As long as the lease option period is in effect, the landlord/seller may not offer the property for sale to anyone else.


When the term expires, the renter must either exercise or forfeit the purchase option. A lease option gives a renter/potential buyer more flexibility than a lease-purchase agreement, which requires the renter to purchase the property at the end of the rental period.

Explaining 'Lease Option '

The property owner may charge the renter a premium for the option to purchase the property, perhaps in the form of higher (above market value) monthly rental payments. The property owner may opt to apply some of the higher rental fee toward the purchase price if the renter exercises the option.


Any premium will likely be forfeited if the option is not exercised. The term of the option may be any period on which the property owner/landlord and potential purchaser/renter agree, but is commonly one to three years. The lease-option property's purchase price may be determined either at the outset of the agreement or at its conclusion.


Further Reading


Lease terms, option pricing and the financial characteristics of property
www.jstor.org [PDF]
… Finally small and medium enterprises are implored to consider best option of financing their businesses in order to have a balanced cash … A General Solution to the Buy or Lease Decision: A Pedagogical Note: Comment … Journal of International Finance & Economics, 8(3), 93-103 …

Capital market imperfections and the incentive to leaseCapital market imperfections and the incentive to lease
www.sciencedirect.com [PDF]
… Finally small and medium enterprises are implored to consider best option of financing their businesses in order to have a balanced cash … A General Solution to the Buy or Lease Decision: A Pedagogical Note: Comment … Journal of International Finance & Economics, 8(3), 93-103 …

Valuing lease contracts a real-options approachValuing lease contracts a real-options approach
www.sciencedirect.com [PDF]
… Finally small and medium enterprises are implored to consider best option of financing their businesses in order to have a balanced cash … A General Solution to the Buy or Lease Decision: A Pedagogical Note: Comment … Journal of International Finance & Economics, 8(3), 93-103 …

Risk management in supply chain: a real option approachRisk management in supply chain: a real option approach
www.emerald.com [PDF]
… Finally small and medium enterprises are implored to consider best option of financing their businesses in order to have a balanced cash … A General Solution to the Buy or Lease Decision: A Pedagogical Note: Comment … Journal of International Finance & Economics, 8(3), 93-103 …

The pricing of embedded options in real estate lease contractsThe pricing of embedded options in real estate lease contracts
aresjournals.org [PDF]
… Finally small and medium enterprises are implored to consider best option of financing their businesses in order to have a balanced cash … A General Solution to the Buy or Lease Decision: A Pedagogical Note: Comment … Journal of International Finance & Economics, 8(3), 93-103 …

Valuing long-term leases: The option to redevelopValuing long-term leases: The option to redevelop
link.springer.com [PDF]
… Finally small and medium enterprises are implored to consider best option of financing their businesses in order to have a balanced cash … A General Solution to the Buy or Lease Decision: A Pedagogical Note: Comment … Journal of International Finance & Economics, 8(3), 93-103 …

The case for using options to evaluate salvage values in financial leasesThe case for using options to evaluate salvage values in financial leases
www.jstor.org [PDF]
… Finally small and medium enterprises are implored to consider best option of financing their businesses in order to have a balanced cash … A General Solution to the Buy or Lease Decision: A Pedagogical Note: Comment … Journal of International Finance & Economics, 8(3), 93-103 …

Valuing lease contracts under incomplete information: A real-options approachValuing lease contracts under incomplete information: A real-options approach
www.tandfonline.com [PDF]
… Finally small and medium enterprises are implored to consider best option of financing their businesses in order to have a balanced cash … A General Solution to the Buy or Lease Decision: A Pedagogical Note: Comment … Journal of International Finance & Economics, 8(3), 93-103 …

Survival of the fittest? Financial and economic distress and restructuring outcomes in Chapter 11Survival of the fittest? Financial and economic distress and restructuring outcomes in Chapter 11
papers.ssrn.com [PDF]
… Finally small and medium enterprises are implored to consider best option of financing their businesses in order to have a balanced cash … A General Solution to the Buy or Lease Decision: A Pedagogical Note: Comment … Journal of International Finance & Economics, 8(3), 93-103 …



Q&A About Lease Option


How does a rent-to-own differ from a traditional lease?

In a traditional lease the lessee has no right to purchase the item being leased whereas in a rent-to-own transaction the lessee can purchase the item at any time during the agreement.

How much can you charge as premium for this type of agreement?

You can charge as much as you want for this type of agreement.

How does it differ from hire purchase/installment plan?

In hire purchase/installment plan, buyers have limited time if any to cancel their agreements while in rent-to-own transactions they can terminate by simply returning property.

Who may not offer the property for sale while a lease option is in effect?

The landlord-seller may not offer the property for sale while a lease option is in effect.

What is a rent-to-own transaction?

A rent-to-own transaction is when tangible property such as furniture, consumer electronics, motor vehicles, home appliances and engagement rings are leased in exchange for a weekly or monthly payment with the option to purchase at some point during the agreement.

When does an exercise or forfeiture occur under a lease option agreement?

At the end of term, when exercising or forfeiting occurs.

What is a lease option?

A lease option gives the renter the choice to purchase a property during or at the end of the rental period.

Is there any flexibility with regard to purchasing power under this type of agreement?

Yes, there is more flexibility than with other types of agreements.