Some or all of the rent and sometimes an option fee is held to accumulate the down payment. At the end of the contract, usually six to 12 months, the lessee has the option to use the down payment toward the purchase of the home for an amount agreed upon at the onset of the contract. Seller-backed lease options are most often a better deal for the lessor, particularly one who has already moved and left the property empty. During the contract, the lessor acquires rent as income which acts to dam up any equity drain. If the lessee opts to buy, the lessor has reached his or her goal.
Options are risky for both sellers and buyers.
Sellers likely won't go for a lease option in a hot market because of the contractually agreed upon price and the probably that prices could rise by the time the contract expires and the buyer opts to buy. For buyers, keeping up with lease-option payments can be tough. A lease-option's monthly payment is generally higher than the going rents for identical rental properties because the lease option payment must cover both rent, down payment savings and maybe an option fee. Also if the buyer can't qualify for a loan at the end of the contract, he or she loses money paid to date. In a down market, if the value falls the buyer will have to buy at the higher, previously agreed-upon price, or again, lose the cash paid into the deal.