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Field Guide to Lease-Option Purchases

(Updated September 2014)​

Lease-option agreements* are common when acquiring personal property—such as dishwashers, washing machines, automobiles, and TVs—but are not as common for the acquisition of real property. Lease-option agreements are generally utilized in residential real estate acquisition when a home buyer would like to purchase a home, but needs to repair her credit rating in order to secure a promissory note and mortgage. The lease-option agreement allows a buyer to lease a property for a set period of time—typically between 1-3 years—with the option to buy the property at a contractual future date. “The negotiated option is typically a percentage of the price for example, one to five percent, and is credited, along with the rents and a rent premium, to the purchase price if the lessee buys the property. If the option to buy is not exercised, the buyer will lose the option fee and rent premium.” (Real Estate Law, p. 227). Read the articles below to learn more about this alternative real estate financing option. (K. Stockert, Information & Web Content Specialist)

*Also known as lease-to-own, rent-to-own, lease/purchase, lease with an option to purchase, or real options.


Q - ProQuest articles available for NAR members only. Password can be found on the ProQuest/Find Articles page.


Lease to Own: The Basics

How do Lease Purchase Agreements Work? (SFGate, n.d.).

Sale-Leaseback Transactions: Price Premiums and Market Efficiency, (Journal of Real Estate Research, Apr-Jun 2010). Q

How Do I Get a List of Rent to Own Homes? (realtor.com®, July 25, 2012).

Will I Be Able To Find A Rent To Own Property In Rhode Island? (realtor.com®, May 24, 2012).

How Do I Find A Rent To Own Home In Bristol, Pennsylvania? (realtor.com®, May 10, 2012).

How Do I Find A Realtor To Explain The Rent To Own Option? (realtor.com®, Apr. 6, 2012).

Lease-to-Own Contracts, (UCLA School of Law, 2012).

Lease options are back: proceed carefully, (Realty Times, Oct. 25, 2011).

Informal Homeownership in the United States and the Law, see page 132. (University of Texas School of Law, 2010).

How lease-options benefit sellers, buyers ... and their REALTORS®?, (CRE Online, n.d.).

Thought about lease-to-own transactions?, (REALTOR® Magazine - Speaking of Real Estate blog, Aug. 6, 2009).

New Real Estate Law, (International Financial Law Review, Mar. 2007). Q

Renting to Own, (realtor.com®, n.d.)

Case Studies & Examples

Lease-to-own deals offer options in sluggish Tampa Bay housing market, (St. Petersburg Times, Oct. 23, 2011).

Can I get a lease option with bad credit?, (realtor.com®, May 5, 2011).

A Growing Housing Imbalance, (Mortgage Banking, Oct. 2011). Q

Raising Capital through Sale-Leasebacks, (Public Management, June 2010). Q

Rent-To-Own Real Estate Full Of Pitfalls, (Forbes, Mar. 19, 2010).

Lease Buyout Portion of Purchase Ruled Deductible, (Journal of Accountancy, Dec. 2008). Q

Application of Real Options Analysis to Technology Portfolio Planning: A Case Study, (The International Journal of Quality & Reliability Management, 2008). Q

Tax Implications

Individual Taxation Developments, (The Tax Adviser, Mar. 2012). Q

Comparing Accounting and Taxation for Leases: Certified Public Accountant, (The CPA Journal, Apr. 2009). Q

Tax Considerations for Buying and Selling Property with a Burdensome Lease, (Journal of Accountancy, 2009). Q

Lessee Deducts Excessive Cost of Buying Rented Property, (Practical Tax Strategies, Oct. 2008). Q

Government Publications & Programs

State Agency Lease/Purchase Program, (Washington State Treasurer’s Office, n.d.).

Recent State Agency Lease/Purchase Interest Rates – Real Estate Only (Washington State Treasurer’s Office, n.d.).

Definition from Washington State:

Lease/Purchase Obligations (Real Estate) — Lease/purchase obligations are contracts entered into by the state which provide for the use and purchase of real or personal property, and provide for payment by the state over a term of more than one year. For reference, see RCW chapter 39.94 "Financing Contracts." Lease/purchase obligations are one type of lease-development alternative.” (Financial Budget Instructions Glossary of Terms, Washington State Office of Financial Management, n.d.).

Non-Mortgage Alternatives to RE Financing from Reference Book – A Real Estate Guide, (California Department of Real Estate, 2010).

LFC Hearing Brief, (New Mexico Legislative Finance Committee, Dec. 2007).

Instructions for the Lease/Purchase Analysis Modeling Tool, (Idaho State Leasing Dept. of Administration, n.d.).

eBooks & Other Resources

The following eBooks and digital audiobooks are available to NAR members:

eBooks.realtor.org

Smart Guide to Real Estate: Step by Step Rent to Own, (Kindle and EPUB)

Investing in Rent-to-Own Property, 2010 (ePub)

Investing in Real Estate With Lease Options and “Subject to” Deals, 2005 (ePub)

Books, Videos, Research Reports & More

The resources below are available for loan through Information Central. Up to three books, tapes, CDs and/or DVDs can be borrowed for 30 days from the Library for a nominal fee of $10. Call Information Central at 800-874-6500 for assistance.

Who Says You Can’t Buy a Home! HG 2040.5 R25w (2006).

Miscellaneous

Research on Your Own

To search for the most recent articles on this topic, access ProQuest and enter subject terms such as:

  • Lease Purchase Properties
    • Enter into ProQuest text box as (lease w/5 purchase) w/25 (property OR "real estate")

Information Savvy

Many websites, such as Wikipedia, can be great resources to quickly orient yourself on a subject before conducting more in depth research. However, anyone in the world can create and maintain a website or write a seemingly legitimate article and may, intentionally or unintentionally, publish false or “misinformation.” When reviewing information on the Internet, you should always consider the ABC’s:

  • Accuracy. Is the information accurate? Can you confirm the same information using other resources published by a different author or organization?
  • Author. Who composed the information? Can you easily identify the author and contact the author or website publisher?
  • Bias. What bias might the author or author organization have?
  • Credibility. What are the author’s or author organization’s credentials for publishing the information? What expertise, experience, or education does the author have in this area that makes him or her qualified to write on the subject matter?
  • Currency. When was the web page last updated? Is it possible the information might have changed since this web page was last published?
  • Critical eye. Remember to always use your discretion and critical eye to determine whether information you find on the web (or even in books and news sources) is trustworthy. Putting websites to the ABC test will get you started in developing a strong critical eye.

Field Guides & More

These field guides and other resources in the Virtual Library may also be of interest:

Sale-Leasebacks & Synthetic Leases

Seller Financing

InfoCentral Blog

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The inclusion of links on this field guide does not imply endorsement by the National Association of REALTORS®. NAR makes no representations about whether the content of any external sites which may be linked in this field guide complies with state or federal laws or regulations or with applicable NAR policies. These links are provided for your convenience only and you rely on them at your own risk.