What is a Fixed Price Purchase Option
A fixed price purchase option is the right, but not the obligation, to buy a leased item at the end of a lease term at a price determined from the onset of the lease agreement.
BREAKING DOWN Fixed Price Purchase Option
A fixed price purchase option's purchase price is established when the lease terms are agreed upon. The lease agreement should also describe when the option can be exercised. This agreement usually sets the timing to occur at the end of the scheduled lease term. These terms typically range between 12 and 60 months.
Various types of property come with a fixed price purchase option, but such options apply most commonly to the leasing and purchase of real estate, heavy equipment, or automobiles. A common variation on this arrangement is the sort of lease option offered by mobile phone companies which allow customers to lease certain phones for a period of time, and at the lease term end, either trade in the phone for a new one, or pay the total value of the phone, which is set at a fixed price at the beginning of the lease term.
The advantage of the fixed price purchase option for the lessee is that the lessee knows with certainty what the cost to purchase the property will be.
Comparing Fixed Price Purchase Option to Fair Market Value Purchase Option
In contrast to a fixed price purchase option, a fair market value purchase option gives the consumer the option to purchase the leased item at the end of the lease term at a price based on the item's fair market value at the time of the lease's expiration.
The main drawback of the fair market value purchase option is that the consumer will not know in advance how much the purchase price will be. However, while the fair market value purchase option does not offer the purchase price in advance, as long as the assessed fair market value is accurate, the buyer need not worry that they will overpay for the property and, similarly, the lessor need not worry that they will receive less than the item’s actual value.
When given the choice between these buying options, a consumer will do well to consider the type of property itself. A fair market value option, for instance, is a good choice for companies leasing equipment such as security systems; servers, computers, and other IT needs; and other technology-based equipment. Technology changes at such a high speed that consumers want to avoid equipment that will become obsolete in a few years. Consumers buying equipment with longer life cycles, on the other hand, may choose the fixed price option, though they may end up with a higher monthly lease payment.