A lease-option agreement should be looked at as “buying the right to buy at some future time”.
The objective is to assure both the tenant/buyer and landlord/seller that the property may be
transferred at a presently-agreed price at the end of the time period stipulated in the lease-option agreement.
Steps to the creation of a lease option to buy:
A purchase agreement (RPA-CA) must be completed and executed concurrently with the lease option agreement (and most often, with a lease).
The elements of the option are:
Parties must agree on the future purchase price.
Parties must agree on the time period for the lease (usually one year).
Parties must agree on the amount of the “option money”.
The option money can be any amount (typically one to three percent of the agreed purchase price), must be passed to the landlord/seller by the tenant/buyer at the time of execution of the lease and will remain, irrevocably, the property of the seller/landlord.
Option money is not to be confused with the security deposit for the lease itself; these are two completely different matters and two different sums of money.
Several variations on the accumulation of the down payment should be considered:
Should all or part of the option money be credited toward down payment?
Should any portion of the monthly rent be credited toward down payment?
Once the lease option agreement is executed by both parties, the landlord/tenant is obligated to sell under the terms of the two contracts (OA and RPA-CA), but the tenant/ buyer is not obligated to buy. The tenant/buyer is a tenant only until close of escrow and the landlord/seller may not jeopardize title (liens, judgments, etc.) during the term of the lease.
Property may be worth less than the agreed price at the end of the option period.
Tenant/buyer may not be able to qualify for a loan at the end of the option period.
Tenant/buyer may damage the property, then leave at the end of the lease period.
Landlord/tenant may have to evict the tenant/buyer at the end of the lease period.
If, at the end of the lease option period, both parties are willing to extend the period, the length of the extension and additional option monies to be paid must be agreed and the lease-option extended in writing by amendment.