Lease with an option to purchase is the better terminology to use.  Lease option, or lease purchase are interchangeable terms to describe the same thing.  In some parts of the country, the term "land contract" is used, and is describing the same type of contract.  Other terms may be "agreement for deed" or "contract for deed".  As with any contract or agreement make sure before signing what the terms of the contract are.  There will be variations from seller to seller.

     Basically, the process is to pay an amount of money to secure the option. The amount is at the discretion of the seller, but a good rule of thumb is to pay 3-5% of the price of the home.  The higher the better, since the amount will help to secure financing down the road.  This is an option payment.  This payment secures the buyer the right to purchase the property in a specified period of time.  If the buyer proceeds with the purchase, then the option sum is applied off the price of the home.  The seller is required to sell if the buyer secures the financing within the specified time.  The buyer is not required to buy, but does not receive the option money back as a refund. 

     During the time of monthly payments the person living in the home is called a tenant/buyer.  A tenant because the home has not been purchased yet, but more than a tenant because the occupant is trying to purchase.  Usually there are more freedoms for a tenant buyer, as to improvements, and decorating, but with those freedoms come more responsibility for repairs.  This needs to spelled out in the lease.  It is also customary for an amount of the monthly payment to be credited to the sales price if payments are on time, and the tenant/buyer actually buys the property.  This amount varies, according to the terms of agreement.

     A lease with an option to purchase is often set up for the period of a year.  That amount of time can also vary.  Sometimes the terms will state that it can be extended for an amount of time, depending on payment record and possibly the care of the home.

     Unlike a "subject to" arrangement, the deed stays in the sellers name until the property is purchased.  It is not in danger of being called due with the due on sale clause.  If the tenant/buyer decides, or cannot purchase the property  within a certain amount of time, the tenant/buyer moves out, and the seller can sell, or rent, or find another lease purchaser.  The tenant/buyer does not receive any refund, unless a separate security deposit was collected. (Not option payment).

                                    Wendy Patton is a specialist in lease options.  She is a popular national speaker, and
    
                                    
     author on the subject.  Finding out her insight on the subject by purchasing her book is a smart investment.
Lease option can be a win/win situation for both buyer and seller.    

    Here is a personal story of how lease with option to purchase helped my family and me in 1985.  When my husband was transferred to a new city, we had not been able to sell  our previous home.  We did not want to rent it to someone, so it was vacant.  Therefore, we did not qualify for a new loan because our debt to income ratio was then too high.  We found a house we liked that the owner would sell by lease option to purchase.  We paid an amount for the option, and our monthly payments had a credit in them.  The term was at $89,000 for the period of one year.  It seemed it would easily sell by then.  However,  four months after our agreement, the home was broke into, vandalized, and set on fire.  It was only a partial loss, and the insurance company paid for the loss, but we were responsible for the mortgage payments for the eight months the home was being cleaned, and repaired.  Then it was put back on the market.  Consequently, we were not ready to finance the home at the end of our lease term.  However, because we made the payments on time, the seller agreed to renew the term for a year, along with an additional sum on the option.  The next year went better, and our previous home was sold, and we were able to finance our present home, thus finalize the lease option.  One other nice bonus for us was the price was kept the same, and when we closed, houses in the neighborhood were in the high 90's to low 100's range.  It was a bonus for the seller to lease option the home because as possible buyer's we kept the home in good condition, and paid on time.  He did not have that worry about the home.

     With the right terms lease option can be a win/win situation for both buyer and seller.  A future article on Real Estate Investor Girl will be how lease option can be used to buy and sell property for the investor.

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     Some other articles on creative financing are: 
         Assuming FHA and VA loans Buying Real Estate by Subject To-Part IIBuying Real Estate by Subject ToThe Smart Investors Advantage-Owner Financing