Definition
A lease option rents your property to a tenant who also receives the right, but not the obligation, to purchase the home later at a price agreed upon up front. The tenant typically pays an upfront option fee for that right, and sometimes a portion of their monthly rent is credited toward the eventual purchase price. As the seller, you keep legal title to the home the entire time the lease option is in effect, which also means you keep the responsibility for property taxes, insurance, and major repairs until the sale, if any, actually closes. This arrangement can attract a tenant-buyer who isn't quite ready to qualify for a mortgage but wants to lock in a future purchase price. The tradeoff for you is a longer, less certain path to your final payday compared to a direct sale, along with ongoing landlord duties in the meantime. It's an option worth considering only if you're comfortable holding the property and the associated risk for an extended period.
Example
Robert leases his house to a young family for two years at $2,100 per month, collecting a $6,000 non-refundable option fee and agreeing to a $280,000 purchase price if they exercise the option. Each month, $200 of the rent is credited toward the eventual down payment as outlined in their written agreement, which Robert had a real estate attorney draft carefully. About eighteen months in, the family calls Robert to say a job loss has set back their savings and credit repair plans, and they're not sure they'll be ready to buy by the two-year deadline. Robert has to decide whether to extend the option period or let it expire as originally written. If the family doesn't qualify for a mortgage or decides not to buy by the end of the two years, Robert keeps the option fee, the rent credits are forfeited, and he keeps the house to sell or lease again to someone else.