Lease option
A rental contract that gives the tenant the right, but not the obligation, to buy the property at a set price during or at the end of the term. The tenant can walk away if they choose not to purchase.
Key Takeaways
- A lease option gives the tenant the right to buy and no duty to buy, so the tenant can let the option lapse and move out.
- A lease option is the classic unilateral contract. The owner is bound to sell at the stated price, and the tenant is bound to nothing until the option is exercised.
- Most lease options must be exercised before the lease term ends. The contract itself sets the deadline and the way notice must be given.
- In Washington, a lease with an option to purchase is taxed at exercise, not at signing. The taxable selling price is the property's true and fair value on that date (WAC 458-61A-102).
What It Means
A lease option is two agreements bound together: a lease that puts a tenant in Possession now, and an option that lets that same tenant buy the property at a price fixed today, exercisable during or at the end of the lease term. The tenant pays rent, and usually pays separate option Consideration for the right to buy. What makes the arrangement distinctive is that the obligation runs one way. The owner is locked in and must sell if the option is exercised. The tenant is free to walk away and lose nothing but the option money.
That one-sided structure is why courses use a lease option as the textbook Unilateral Contract. Only one party has promised performance until the other acts. Exercising the option changes that: once the tenant gives notice in the manner the contract requires, the option ripens into a binding purchase contract and both sides are obligated. Miss the deadline and the right evaporates. A lease option is not a lease purchase, where the tenant has already promised to buy and cannot walk.
How It Works in Washington
Two Washington rules shape how a lease option is written. First, put it in writing. RCW 19.36.010 makes void any agreement that by its terms is not to be performed within one year, unless the agreement, or some note or memorandum of it, is in writing and signed by the party to be charged. That covers the typical multi-year option. RCW 64.04.010 adds that every conveyance of real estate, or of any interest in it, shall be by deed. RCW 59.04.010 says tenancies from year to year are abolished except when created by express written contract. Washington gives an oral lease option nothing to stand on.
Second, the tenant is still a tenant. RCW 59.18.040(2) exempts from the Residential Landlord-Tenant Act only occupancy under a bona fide earnest money agreement to purchase or contract of sale, where the tenant is, or stands in the place of, the purchaser. An option the tenant has not exercised is not yet a purchase. A landlord should assume the full act still applies to notices, repairs, and the Security Deposit. Excise tax follows the same logic. Under WAC 458-61A-102, the date of sale for a lease with option to purchase is the date the option is exercised and the property is transferred. The selling price is the true and fair value of the property at that moment, not the option price set years earlier.
Example
Marcus rents a three-bedroom house in Kent from the Okoye family for $2,650 a month on a two-year lease. The lease carries an option: at any time before the lease ends on August 31, 2028, Marcus may buy the house for $585,000. He pays $9,000 in option consideration up front, and the contract credits that $9,000 against the price if he buys and lets the Okoyes keep it if he does not.
Marcus's credit improves, and by June 2028 the house appraises at $624,000. He gives written notice, exercises the option, and the arrangement becomes a binding purchase at $585,000. He brings $576,000 to closing after the $9,000 credit and captures $39,000 in built-in equity. Excise tax is figured at exercise on the $624,000 true and fair value rather than the $585,000 option price. Had Marcus lost his job instead, he could have let August 31 pass, moved out, and forfeited only the $9,000. The Okoyes would have had no claim against him for the purchase price.
Common Mistakes and Exam Traps
- A lease option is not a lease purchase. The option gives the tenant a right to buy and is unilateral; a lease purchase obligates the tenant to buy and is bilateral.
- Option consideration is not earnest money and it is not a security deposit. It buys the right to purchase, and whether any of it is credited against the price depends entirely on what the contract says.
- The optionee is the tenant who holds the right to buy and the optionor is the owner who must sell if it is exercised. Test questions routinely swap the two.
- An option not exercised on time is dead, and good intentions do not revive it. A tenant who misses the deadline is simply a tenant again.
Where you'll learn this
Frequently Asked Questions
What is the difference between a lease option and a lease purchase?
In a lease option the tenant holds a right to buy and can choose not to, which makes the contract unilateral until the option is exercised. In a lease purchase the tenant has already agreed to buy, so both parties are obligated from the start and the seller can pursue the buyer for performance.
Does the option money count toward the purchase price?
Only if the contract says so. Some Washington lease options credit all or part of the option consideration against the price at closing, and others treat it purely as the seller's fee for tying up the property. The option paragraph controls, so read it before signing.
Can the owner sell the property to someone else during the option period?
Not free of the option. The owner has promised to sell to the option holder at the agreed price for the agreed window, so selling out from under that promise invites a claim. Brokers commonly record a memorandum of the option so later buyers and lenders see it in the title record.