In simplest terms, a real estate lease option is the right to control a property without the obligation to buy it. As a real estate investor, when you have such an option, you have the opportunity to buy a property during a set period of time, but you aren’t required to do so. The time period is agreed to by you and the seller at the time the agreement is signed. If you don’t exercise your right as a buyer, the lease option expires, and you have no further responsibility to the seller. In most cases, you’ll have to pay an option fee. That fee may or may not be applied to the property’s purchase price, depending on the circumstances of the situation.
As with any real estate investment strategy, there are benefits and downsides to lease options. One of the great benefits is that they’re inexpensive in terms of the amount of money you have to put into each deal. This is to say that you only have to lay down a small percentage of funds instead of needing to raise the full amount to control a property.
Here’s an example to illustrate this point: Assume an investor wants to buy an option on a property. The property is worth $200,000, and the option fee amounts to 10% of that price, which is $20,000 and considerably less, obviously, than $200,000.