Do I return the option fee if the tenant buyer does not buy the home on a lease option?

If you own a property and you’re offering it to a tenant buyer on a lease option, you’ve probably collected an option fee. Option fees are fees paid to you that give the tenant buyer the right, but not the obligation, to buy the property from you. Their option usually has a pre-agreed upon time frame for them to buy and a pre-agreed upon price.

But, what happens if the tenant buyer does not opt to buy the property from you? Do you get to keep their option fee?

Well, it really depends on what your agreement with them actually says. However… if you structure it the way I suggest, the option fee is yours to keep. If they do not exercise their option, the option fee was simply the fee they paid in order to have that option. It is not a refundable deposit that they get back if they decide not to buy.

When some folks hear that, they incorrectly believe that it is a bad deal for the tenant buyer. They think that if the tenant buyer does not buy then they should get the option fee back. I see it very differently.

If the tenant buyer had purchased the property outright–instead of purchasing an option to buy the property–and then decided they did not want to own the property anymore, they’d need to sell the property to recoup their down payment minus the expenses of the initial purchase and the expenses of the second sale. Ignore the cost of the initial purchase which could easily be close to 2% of the purchase price when you consider a 1% origination fee for a loan, plus appraisal and other closing costs. Let’s just talk about the cost to sell the property. Most real estate agents in our local market would charge about 6% to sell the property. In addition, closing costs, depending on what you negotiate, could be an additional 1%. That’s easily pushing 7% of the price of the house.

If the tenant buyer put up less than 7% of the purchase price as an option fee, they’re actually coming out ahead by walking away.

If the tenant buyer has built up equity in the property, they can still exercise their option and then sell the property to capture that build up of equity–but that’s a future discussion.

If you’re interested in buying a property from our local MLS and then offering it to tenant buyers on a lease option, let me know; I’d be happy to help.

Lease Option FAQs

Option Fee