Lease option is better when values are rising and much worse when values are falling. It can also benefit someone short of a down payment.
standard L/O scenario is lets say you find a house that is on the market for 500k and would rent for $2500, the lease option might involve a minor downpayment, let’s say 5 or 10k and a rent of $3000, with $500 each month being deposited into an account being added to your 5 or 10k. The lease option can be set for finite amount of time, lets say 1 year. At the end of a year you will have added 6k to your potential downpayment kitty and you can now buy it for the price you agreed upon when you first moved in. If the value has fallen to 600k, you are out the entire kitty (16k) and you walk away. If it rises to 800k, you put the 16k down and get the house for 700k with a loan of 684k and you are up 116k. The problem is right now you can no longer get financing with only 16k down on 700k and the odds of it appreciating is almost nil, so you will have just been renting for a 30% premium.
It’s almost just like stock options and if R/E were a stock would you really want to lock in today’s price and pay a fee for that privelige when it’s almost certain the price will not rise. In 2001 through 2004 it was a decent play but in 2008 it is a suckers bet.
