Lease Option Definition

A lease option, formally a lease with option to purchase, is a type of contract used in residential real estate leasing. The contract requires the tenant, or lessee, to make payments to the landlord, or lessor, in exchange for having use of the property. In this respects, a lease options is like a traditional lease. The contract varies from a typical lease, however, because upon the expiration of the lease period the tenant can exercise the lease option to purchase the property-usually by obtaining a mortgage from a third party.

With some lease options, the funds paid during the lease period are considered, in part, to form a down payment on the property, though if the tenant does not exercise the option to purchase these funds are always retained by the landlord. Lease options are found popular with some renters because they do not require an initial large down payment. However, lease options almost always cost more than simply purchasing an equivalent property.