The option fee and rent premium are viewed differently by buyers and sellers. To the buyer, they are part of the equity in the house they fully expect to own.

The option fee and rent premium are viewed differently by buyers and sellers. To the buyer, they are part of the equity in the house they fully expect to own. 

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To sellers, however, these payments are the best guarantee that their houses will sell; if they don’t sell, the payments are retained as income. 

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That the benefit to the seller generally exceeds the cost to the buyer makes the lease-to-own deal a possible win-win.

A lease purchase contract may or may not give the renter/buyer the right to sell the option. This will have value to the buyer who isn’t completely confident of being able to exercise the option. It is a cost to the seller who prefers to retain the house and the monies collected.

Lease contracts may also contain provisions that nullify the buyer’s option, a point discussed below.

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Using a Lease-Purchase to Buy The lease-purchase offers home ownership opportunities to consumers who can't qualify for a loan from any source, but who are prepared to bet on themselves. The bet is that before the option period expires, they will qualify for the mortgage they need to exercise the purchase option. During the option period, they have the opportunity to rebuild their credit and accumulate savings while living in the house.

Even though it is costly, the right not to exercise the option is of value to buyers. If there is something seriously wrong with the house, neighborhood, or neighbors, the buyer can cut her losses by not exercising the option.

Dangers to Buyers A major threat to buyers is contractual provisions that can nullify their option, such as the failure to pay the rent on the first day of the month. Such provisions are most likely to appear in contracts used by developers or firms that own multiple homes. One such firm in Florida had more evictions based on unreasonable conditions than they had purchases. Read the contract very carefully to make sure you are confident you can meet all the conditions.

Using a Lease-Purchase to Sell Most home sellers want a cash sale, but for those prepared to hang on to the property awhile longer, the benefits can be compelling. Buyers unable to become homeowners in any other way will generally be willing to commit to a future price substantially higher than the price at which the property could be sold today.

While the deal may fall through, in that case the seller gets to pocket the option fee and rent premium. The seller also continues to enjoy the tax deduction on his mortgage interest payments during the option period. The Option Fee and Rent Premium Are Not Part of the Down Payment

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The option fee and rent premium are not part of the down payment unless the seller agrees to relinquish the right to retain these payments in the event the buyer doesn’t exercise the option. Few sellers would be willing to do that. But the option fee and rent payments do make the required down payment slightly smaller.

For example, the parties agree to a price of $100,000 and the option fee and rent premium add to $5,000 when the option is exercised. From the standpoint of the lender, the price is $95,000 and a 5% down payment requirement would call for a down payment of $4750 instead of $5,000.