Key Takeaways

  • Option to purchase rights in leases allow tenants or investors to secure the right—but not the obligation—to purchase property in the future.
  • Lease-option and lease-purchase agreements differ in terms of commitment to buy.
  • These agreements are beneficial for buyers with limited financing or credit issues.
  • Key contract elements include option consideration, exercise terms, price, and clear deadlines.
  • Legal enforceability requires specificity and proper drafting; state laws may vary.
  • Investors use purchase options to control property without immediate purchase commitments.An option to buy contract is an agreement between two parties where an investor or tenant pays a fee in exchange for the rights to purchase property at some point in the future. You can have a straight option to buy a contract, which is a unilateral contract that only binds the seller to its terms. Under this type of contract, a landowner or homeowner will keep open the offer for sale in return for a certain fee paid by the buyer, also referred to as the optionee.

Option to Buy Contracts in Real Estate

In a straight option to buy contract, the ability to purchase is available for a certain period of time at the agreed-upon price. When this type of contract is used in a residential contract, it is often considered a rent-to-own agreement or a lease option in real estate terms. The tenant will enter into the lease or rental agreement with the option to buy the rental in the future part of the agreement.

If a lease option is chosen, a portion of the tenant's rent is applied to the principal of the purchase option on the house. These types of options contracts allow those looking to buy a home or property to put the purchase on hold until they are ready or have the financial means to complete the sale. In essence, an option contract involves an offer that cannot be revoked. It is the same as making a sale on the house or property, just on a more lengthy time schedule.

Benefits and Risks of Lease Options for Tenants and Landlords

For Tenants:

  • Build credit and save for a down payment while leasing.
  • Lock in a purchase price even if market values increase.
  • Test the property and neighborhood before fully committing.

Risks include:

  • Losing the option fee if the purchase is not completed.
  • Responsibility for repairs, depending on the agreement terms.
  • Potential eviction or forfeiture if rent is not paid on time.

For Landlords/Sellers:

  • Receive additional income through the nonrefundable option fee.
  • Attract tenants who are motivated to care for the property.
  • Potential to sell the property without immediate market listing.

Risks include:

  • Market value may increase beyond the agreed sale price.
  • Legal complexities if the agreement is not clear or becomes disputed.

How Lease Options Differ from Lease Purchases

Although often confused, lease-option and lease-purchase agreements involve distinct legal rights and obligations. Both provide tenants with the ability to live in a rental property with the potential to buy it later, but the commitment levels differ:

  • Lease-Option Agreements: Tenants have the option, not the obligation, to purchase the property at the end of the lease term. If they choose not to exercise the option, the seller cannot sue for breach of contract.
  • Lease-Purchase Agreements: These require the tenant to purchase the property at the end of the lease period. They are binding purchase agreements that are only delayed until financing or other conditions are met.

This distinction is crucial for anyone considering an agreement involving the option to purchase rights in leases, particularly in residential real estate.

Other Uses for Option to Buy Contracts

While option to buy contracts are most widely used in real estate, they can be used for the option to purchase other things as well. When a contract is made, it becomes binding — the seller must sell and the buyer must buy according to the agreed-upon terms and price. One a contract for an option to buy has been created, the property cannot be sold to anyone else.

When creating a contract, the buyer will often pay a fee to have this option. They will agree upon the price as well as the term that the price will be valid for. Typically terms are valid for six months to a year. What is unique about these types of contracts is that it binds the seller to sell the property by the agreed-upon terms of the contract, but the buyer does not have to purchase it in the end. If the buyer decides to not complete the purchase within the agreed-upon timeframe, the seller is allowed to keep the fee money that was paid to have the option to buy included in the contract.

Option to buy contracts is often used by builders and developers who are looking to build large subdivisions or luxury homes. The builder may choose this option so they have the ability to test the land and ensure that zoning will go through properly. If the builder did not have an option to buy, they may have to invest a significant amount of time and money to check the property without having the guarantee of being able to purchase it if it is found suitable.

Another party that often uses option to buy contracts are real estate investors who may want to hold property they expect will appreciate more in the future. By doing this, they are able to lock into the lower current price and take advantage of the higher value in the future if the property does appreciate in value.

Strategic Use of Purchase Options in Commercial and Investment Leasing

In commercial real estate, the option to purchase rights in leases are often utilized by tenants who want to test a location before committing long-term. These agreements give businesses operational flexibility and the ability to plan for eventual ownership.

For investors and developers:

  • Land banking: Acquire control of multiple parcels without upfront purchases.
  • Zoning exploration: Secure rights to properties while obtaining rezoning or permits.
  • Market speculation: Lock in lower prices in areas expected to appreciate.

These strategies allow real estate professionals to maximize return while mitigating initial risk.

What Should Be Included in an Option to Buy?

To make sure that your option to buy will be considered a valid and binding contract, there are multiple things that need to be included and procedures that should be followed. Your option to buy should:

  • Be made in writing, as a handshake or verbal contract is not considered sufficient
  • Include the signatures of all parties as well as the date
  • Verify that one of the signing parties is the title holder
  • Include the address of the property
  • Include the parcel identification number

Legal Considerations and Drafting Tips

To ensure enforceability of a contract involving option to purchase rights in leases, legal professionals recommend the following:

  • Clarity on deadlines: Specify the exact date by which the purchase option must be exercised.
  • Fixed or formulaic purchase price: Define the purchase price in advance or provide a clear calculation method.
  • Option consideration: State the amount paid for the option and whether it applies to the purchase price.
  • Disclosure of responsibilities: Outline who handles taxes, maintenance, and repairs during the lease term.
  • Right to assign: Indicate whether the option is assignable to another party.
  • Governing law: Reference the applicable state law, as enforceability may vary by jurisdiction.

It's also recommended to consult a real estate attorney to draft or review such agreements. You can find experienced attorneys through UpCounsel who specialize in contracts involving options to purchase real estate.

Frequently Asked Questions

1. What is the main difference between a lease-option and a lease-purchase agreement? A lease-option allows the tenant to choose whether to buy the property, while a lease-purchase requires the tenant to buy at the end of the lease.

2. Is the option fee refundable? Typically, the option fee is nonrefundable, even if the tenant does not exercise the purchase right.

3. Can an option to purchase be assigned to someone else? It depends on the contract terms. Some agreements allow assignment, while others specifically prohibit it.

4. What happens if the tenant can’t qualify for financing at the end of the lease? In a lease-option, the tenant simply forfeits the right to buy. In a lease-purchase, the tenant may be in breach of contract.

5. Does the landlord have to sell the property if the tenant exercises the option? Yes, if the tenant validly exercises the option under the terms of the agreement, the seller is legally bound to complete the sale.

If you need help with an option to buy contract, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.