DEFINITION of 'Lease Option '

An agreement that gives a renter the choice to purchase a property during or at the end of the rental period. As long as the lease option period is in effect, the landlord/seller may not offer the property for sale to anyone else.


When the term expires, the renter must either exercise or forfeit the purchase option. A lease option gives a renter/potential buyer more flexibility than a lease-purchase agreement, which requires the renter to purchase the property at the end of the rental period.

BREAKING DOWN 'Lease Option '

The property owner may charge the renter a premium for the option to purchase the property, perhaps in the form of higher (above market value) monthly rental payments. The property owner may opt to apply some of the higher rental fee toward the purchase price if the renter exercises the option.


Any premium will likely be forfeited if the option is not exercised. The term of the option may be any period on which the property owner/landlord and potential purchaser/renter agree, but is commonly one to three years. The lease-option property's purchase price may be determined either at the outset of the agreement or at its conclusion.

RELATED TERMS
  1. Renter's Insurance

    Renter's insurance is property insurance that covers a policyholder's ...
  2. Fixed Price Purchase Option

    The right, but not the obligation, to buy a leased item at a ...
  3. Residential Rental Property

    Residential rental property is a type of investment property ...
  4. Earning Assets

    Earning assets are an income-producing investment owned by a ...
  5. Investment Property

    An investment property is a real estate property purchased with ...
  6. Early Exercise

    Early exercise is the process of buying or selling shares under ...
Related Articles
  1. Investing

    Renter Nation: Half of Largest Cities Now Majority Renter

    More people are becoming home renters instead of homeowners. Societal supports need to catch up.
  2. Insurance

    Renter's Insurance: A Comprehensive Guide

    Everything you need to know about renter's insurance.
  3. Investing

    Top 10 features of a profitable rental property

    Purchasing a residential rental property may sound great. But do you know what to consider when searching for the right property? Check out the following factors that can help your investment ...
  4. Investing

    Why It's a Good Time to Own Rental Property

    With a record number of Americans renting, owning a rental property has never been more desirable.
  5. Investing

    Is 2017 the Year to Invest in a Rental Property?

    The rental housing forecast looks positive for 2017, and for some would-be real estate investors it may be the right time to acquire a rental property.
  6. Taxes

    How To Prevent A Tax Hit When Selling A Rental Property

    Rental property ownership has its benefits but when selling you can face a big tax hit. Thankfully there are ways to reduce your capital gains exposure.
  7. Investing

    5 Ways Rental Properties Jumpstart Your Finances

    Rental properties can help pay your mortgage, provide tax benefits and create retirement income.
  8. Investing

    Tips for prospective landlords

    Investing in rental property can generate serious income, but there's more to it than collecting rent. Check out all the pros and cons before you invest in the rental property.
  9. Trading

    4 Reasons To Hold Onto An Option

    There are times when a trader or investor shouldn't exercise an option. Find out when to hold and when to fold.
RELATED FAQS
  1. Can I get renters insurance without a lease?

    Find out whether you need to have a lease before you can get renters insurance. Learn about policy coverage and what information ... Read Answer >>
  2. Does renters insurance cover jewelry?

    Learn what kind of coverage renters insurance provides for your jewelry, and find out what steps you can take to optimize ... Read Answer >>
Hot Definitions
  1. Working Capital

    Working capital, also known as net working capital is a measure of a company's liquidity and operational efficiency.
  2. Bond

    A bond is a fixed income investment in which an investor loans money to an entity (corporate or governmental) that borrows ...
  3. Compound Annual Growth Rate - CAGR

    The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer ...
  4. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
  5. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing a company that measures its current share price relative ...
  6. Internal Rate of Return - IRR

    Internal Rate of Return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments.
Trading Center