Lease Options Emerge in Bad Housing Market

The buyer: A potential property owner who may have suffered a setback (foreclosure, bankruptcy) or is looking to buy but doesn't want to put too much into real estate just yet.
The seller: He's trying to get rid of a nice condo in the city that he's upside down on, and needs to sell now or find another way to make that second mortgage.
The solution: A lease option.

Lease options become popular during down markets, and you're likely to find more of them available if you pay attention to local real estate ads. If you're not familiar with so-called LOs, think of them as a little more than renting and a little less than buying.

"For the leasee, they're getting a good look at the house before they buy it, like an extended test drive," says Idaho Falls, Idaho-based realtor Luke Stallings. "For the leasor, they've got someone paying rent who might buy the property and who'll likely take good care of it."

Here's how it works: The seller/landlord turns over the keys to the buyer/renter after everyone signs an agreement that requires monthly rent that's often more than the market rate over a period of time, say, two years. The new occupant has the option to buy the house at a set price at any time within the lease and a portion of the initial deposit or rent goes toward a down payment on the property.

If you, as the renter, live there two years and your circumstances change or you don't want to buy for any other reason, no harm done, although you usually do sacrifice any money you've put toward a down payment. For the seller, the lease option may give him a buyer or it may not. But what it gives him for certain is a period during which he won't have to worry about a vacant property.