A lease option is not completely risk free though. Property lease options risk is generally limited to the option fee paid and any costs incurred during the option period. Summarily, the Risk for Lease options are:
2.) Market fluctuation
3.) Risk of repairs.
4.) Risk of interest rate going up
This risk can be borne by the Option holder/Renters and the Landlord.
Risk for Option Holders/Renters
In fact most of the risk is held by the Option holder. If the Landlord for example is declared bankrupt then there is the risk the property can be repossessed and the Lease Option holder can lose the investment. Also is the possibility that the lease option will end before he has the funds. He might not have funds to purchase the property at the agreed price. This means that he may forfeit the consideration, or the fee that he paid at the start of the lease. That is why you should ensure that the length of your lease option is sufficient for you to save for a deposit and afford a mortgage.
Furthermore, if mortgage rates rise sharply affecting the mortgage repayments, then the Lease Option holder is exposed to risk (not the Landlord), as they are responsible for meeting the mortgage payments. The Lease Option holder can decide for whatever reason not to pursue the right to buy at the agreed price, thus making use of any break clause in the contract. In this instance ownership simply reverts back to the Landlord. In this case the Landlord simply inherits an asset which has been financed by a 3rd party for the given period of the Lease Option -up to the point at which the break clause has been exercised.
In addition, is the risk that the market will change and that the amount you have agreed to purchase the property for will be above market rates for similar prices. However, for many people, the security of knowing exactly how much they will need to pay for the property far outweighs the risk that they may have been able to find a home cheaper. You may even have a clause that allows you to extend the option period in the event that property prices have not risen.
Risk for Landlords
The biggest risk for landlords is that should the market rise in excess of your predictions you will have committed to selling a property for less than you could get on the open market.
A Tenant might refuse to pay rent or delay payment, eviction costs, lost rents, turn-over expenses, etc. While an upfront down payment (or option fee) does tend to mitigate some of this, it’s definitely not a guarantee that you’ll have smooth sailing.
However, consider all the stress and worry that you are saving yourself with a property lease option – you have responsible tenants, a long lease, and some degree of insurance against a fall in the property market