What is an option fee?
An option fee is an upfront, non-refundable fee that a buyer is required to pay before they may take possession of the home. This fee essentially “buys” the buyer the option to purchase the property during the term of the lease option contract and usually falls between 3% and 5% of the purchase price of the home. While non-refundable, the option fee is subtracted from the final price when the buyer purchases. As an example of how an option fee would apply towards a final purchase, assume Joe Buyer has a lease option to purchase for $120,000 and an upfront option fee of $3,600 ($120,000 * 3% = $3,600). When Joe purchases, his final purchase price would be reduced by $3,600 — or, in this case, $120,000 – $3,600 = $116,400. Combine the final purchase price “buy down” power of the option fee with the over-time “buy down” power of rent credits, and buying your next home as a lease option just makes sense!
The option fee is non-refundable money paid up-front by the Buyer to the Seller for the right to buy the home in the future at an agreed-upon price. It typically ranges from 1.5% – 2.5% of the sales price of the home. The Seller is effectively taking the property off the market for the option period, typically one or two years. As such, the Seller wants to ensure the Buyer will go through with the purchase so that their return can be realized. In the event that the Buyer exercises the option to purchase, the option fee is applied to the Buyer’s down payment on the house. Should the Buyer violate the terms of the lease, or elect to not exercise their option to purchase the home during the term of the option, the option fee is forfeited and kept by the Seller. This gives the Seller some insurance with regard to the sale and intent of the Buyer. In many respects the Seller wins if they sell the house, and wins if they don’t (by retaining the option fee).
