A lease option permits persons with less than perfect credit or with little or no money available for a down payment to purchase a home. It's a great option for some people that want to get into homeownership sooner, but cannot get approved for a mortgage right away.

During the term of the lease, the lessee (also referred to as the optionee/buyer) builds equity at a specified rate so that at the end of the lease period or term, the lessee/buyer has the option of purchasing the property at a specified amount and they've saved up the equity to aid in the down payment. Because there is usually a 6 month or more term to a lease option, this also gives the optionee time to rebuild their credit. Some other advantages are:

  • Purchasing the property at a fixed price
  • Time to check out the home and neighbourhood before committing to buying it
  • Can get into homeownership sooner and into a house versus a condo
  • Lower down payment because of accumulated credits
  • Option to walk away without buying
  • Live in a good area in a mid to upper scale home
  • Should be easier to qualify for a mortgage because of the credits accumulated during the term

     

Generally, the provisions of the lease purchase agreement state that should the lessee/buyer fail to make lease payments as agreed, the deposit is forfeited and the homeowner/seller may evict the lessee/buyer.

There is an upfront option deposit (also referred to as option money), which typically is the only additional fee. There is a monthly payment (just as if you were renting or paying a mortgage). When you exercise your option to purchase, then there will be any fees associated with the purchase and sale agreement (legal fees, land transfer tax, etc.). The homeowner/seller may offer other services or options in the lease option agreement and with those options there may be additional fees, but all points are up for negotiation.

When an optionor (homeowner/seller) and optionee want to move forward with a lease option, they set out an agreement stating how they will proceed, which can be referred to as an Option Deposit Agreement or Lease Option Agreement. In this agreement, all terms are set forth including the option deposit amount, the term of the lease, the time frame the optionee has to exercise the option to purchase, if there is an option to extend the lease, the purchase price of the property during or at the end of the term, the monthly payment, who will pay for damages, and the credit amounts towards the purchase of the property should the optionee decided to purchase the property. Once the agreements are signed for a property, the optionee moves in and the term begins. When the optionee decides to exercise the option to purchase, the optionor and optionee then sign a Purchase and Sale Agreement which will stipulate the closing date, purchase price and any other terms such as who will pay inspection fees. The optionee is responsible for obtaining any necessary financing for the property, just as in a normal purchase and sale situation. When the closing date of the Purchase and Sale Agreement arrives and each party has completed what they said they would as per the agreements, the optionee is then the new homeowner.

You don't have to! That's what is great about having the option to purchase.

This will depend on the terms set out in the lease option agreement and on the other party's comfort level. Generally, subletting the whole property is not acceptable as the optionee is looking to be the homeowner and is assumed to be living in the premises.

There are a few things optionors look for when qualifying an optionee. This can include employment status, credit score, income, monthly expenditures, job stability, range of house prices you're looking for, and who is going to be living in the house. The goal of the qualification process is to make sure you can afford the property and that you are honest in making your monthly payments.

The option is there to look at extending the lease agreement until you do qualify. Not all optionors will allow this, but be aware that should this have to occur, you and the optionor will be working closely together to make sure you're taking the steps to qualify and improve your credit.

Check out the Property Listings {link to property listings} on our site as there are various properties located and whether or not the homeowner is willing to offer a lease option will be stated in the listing. If you want a lease option property but cannot find one on our site, you can sign up as an Optionee {link to optionee application form} and list your desired property and location as a Wish List {link to wish list}. Since we have many users of our sites, many being homeowners, they may have a property not yet listed and can contact you with something that meets your needs.

Typically there are three contracts/agreements used, however there can be up to six types of contracts or agreements that can be used should an investor be involved. The main three agreements are:
1. The Option Deposit Agreement  which outlines how the two parties will proceed
2. The Lease agreement with an Option to Purchase between seller and buyer
3. The Purchase and Sales Agreement that accompanies the Lease with Option to Purchase (this is an optional agreement)
If an investor is involved, there may also be an Assignment Agreement involved.

We recommend you contact your accountant as we are not accountants and everyone's tax situation is different.

Then you can walk away, but you will lose your credits and option deposit/option money. You can also see if the homeowner/optionor is willing to re-negotiate the purchase price, but note that they do not have to make any changes to the original agreement.

You do not. You are taking a bit of a risk here, since you have to anticipate what the real estate market will do, but the house will probably not depreciate that much. Research can be done through Canada Mortgage and Housing Corporation (CMHC) and looking into development plans from the municipal government. You can also look at what the price appreciation of homes in the area has been over the last 5 to 10 years and anticipate this pattern to continue (or an average of it).

This will depend on the terms you set out with the optionor. If you signed an agreement that states the ending date of the term without any stipulation on extending the lease term then unless the owner of the house wants to renegotiate terms you will not be able to. You may also ask for an option to extend the original option when signing the first agreement.

Not unless you had agreed to in the lease agreement. In most cases, the owner of the property is responsible for making the mortgage payments (if any), insurance payments and tax payments. That is, until you purchase the property for yourself.

It's up to you. But be prepared to answer why the option deposit is not coming from you. Remember, the goal is to rebuild YOUR credit, not to use the funds of others.

You should be able to move in as soon as all the necessary documentation/agreements have been signed, and the option deposit has been received by the optionor.

Unfortunately, the purchase price is not negotiable once agreed upon. Usually the optionor has done his/her research into the appreciation rate and is set on the final purchase price. If you do not think the purchase price is fair for the end of the term, you may ask to negotiate this BEFORE you enter into the lease option agreement.

This is the responsibility of the optionee. Any maintenance and/or upgrades to the home will be of direct benefit to you, as it will increase the value of your investment.

All the payments that you are required to make will be outlined in your lease option agreement. Generally, all payments are inclusive when you enter into the lease option agreement but in any case, make sure everything is outlined for you and make sure you understand exactly what your monthly payment is covering and what (if any) is required in addition to your monthly payment. Otherwise it would be safe to assume that the optionor is taking care of any other payment, such as property taxes.

As with any lending institution, you are required to honour all your obligations under the lease option contract and agreement. It is legal and binding. If you fail to pay it on time, you will be considered to be in "default" and the optionor may reserve the right to commence with any legal proceedings or other actions.

If you choose to walk away from your obligation during the term of the lease and not during the option exercise period, you will lose any and all equitable interest in the property as well as any credits. The optionor may also hold you responsible for any and all additional expenses that they might incur due to the breaking of the agreement. Note that this applies for the lease, not the option to purchase as you can decide not to purchase the property without any additional consequences to you other than losing any accumulated credits.

The optionor should have no problem allowing you to do this, but may require you first pay an option deposit to show your commitment. The home inspection would be an additional cost to you, the optionee. Depending on the outcome of the inspection, you may be able to negotiate the purchase price of the home, except do not expect the optionor to budge if there are only minor deficiencies. That being said however, if there is major deficiencies or structural issues, you may have an option to get your deposit back or continue with the agreement and negotiate a different purchase price.

This will all depend on how much you, the optionee, can afford every month and how much is being put aside as credits towards the down payment of the home. This is negotiated by the homeowner (optionor) and you.

No. You can find a property on your own. But there are great benefits of becoming an optionee with us. If you cannot find a property that meets your needs, you can post your request on our wish list so that people can find you.

Lease options are about creating win-win situations. Your optionor should be willing to work with you to help you repair your credit. But if they are not (which they are not obliged to do), you can also take steps to improve your situation and help prepare you qualify for your mortgage. One of our affiliates has a great program to work with new home buyers. Feel free to contact Eminence Financial {link to www.eminencefinancial.ca) and inquire about their Canadian Apprentice program.