Main Difference between Lease Option and Lease Purchase

When dealing with real estate and you are looking at options in the leasing space, it is important to understand the various terminologies like lease option and lease purchase agreement, so that you are not missing anything and are able to use the different formats available to your advantage.

Let us first understand how a lease purchase agreement is different from a lease option.

Though both of them are used very frequently and often interchangeably, they are different in the way they are structured and require different agreements.  

A Lease Option is one where as a tenant, you have the option but not the right to buy the said property and that can happen only if the owner also decides to sell the property.  It is not binding upon the owner to sell the property to you and it is his prerogative to do what he wishes to do with the property.

On the other hand, in a lease purchase agreement, the tenant is required to buy the property before the agreement expires.  Since this is a bilateral agreement, both the interested parties have to perform their part of the agreement.  This kind of an agreement is drawn out when the buyer is unable to become eligible for a mortgage and the seller is also intending to ultimately dispose off the property.  

Often people get confused with the Installment Land Contract term and think that it is some kind of owner financing that permits the transfer of the title of the said property to the purchaser only after he has made good the entire amount.  The understanding is till that time, the property remains in the name of the owner.  However, an appropriately drafted agreement will ensure that the tenant is being given the flexibility to only availing of the property on rent till the termination of the agreement.

So, what is the commonality in a lease option and a lease purchase agreement?

When you see the term "tenant buyer", you must interpret it as another term for "lessee" and is used only as a layman's term and cannot be used in the actual agreement.

There are two parties involved – the owner or lessor and the tenant or lessee.  Some cases may have more than two parties if the lessor has involved a property management consultant to manage the property.  In this case, the tenant or lessee will have to draw up two agreements – one that is a rental agreement with the property management company and one that is a lease purchase agreement with the owner or lessor.

It is to be noted that in both the agreements, the tenant will be typically paying an amount that is definitely more than the market price at that point in time.  That will enable a part of the monthly payment to be adjusted against the purchase or towards the monthly installment if a mortgage has been entered into.  

In the event that the tenant is not able to buy the property, the monthly payments already made will not be refunded.  In fact, the tenant would be considered a defaulter in this case for his failure to buy the property.