Security Deposit and Option Fee Differences

September 7, 2018 by Marty Orefice | Real Estate, Rent to Own

A security deposit is not the same as an option fee.
The rent to own process doesn’t involve a deposit – per say. It involves something similar to a deposit, but that’s not the word for it. Rent to own requires that the buyer pay an option fee in order to lease-option a home.

The Difference Between an Option Fee and a Deposit

Option fees are like deposits in that you give the money to someone in exchange for using their product or service, and then, you have the opportunity to get that money back.

The key difference between the two concepts is the circumstances through which you get each of them back.

When considering strictly real estate deposits are usually security deposits. You get the money back when you return the unit in good condition. Or a hold that a hotel puts on your credit card until you check out of the room in case there are any damages.

Typically, deposits are returned when the product or service is returned to the supplier.

When it comes to an option fee, the conditions of return are very different from security. You get your option fee back as a credit toward the purchase of a home when you actually purchase that home. You forfeit the option fee if you walk away from the purchase.

Consider it like the deposit you give to book a cruise or hotel room. The company uses the deposit to hold a room for you and, if you choose not to attend, you forfeit the deposit.

The one deviation from that model is that those types of deposits are usually refundable for a grace period (i.e. one week from check-in, 30-days before sailing, etc.) When you pay an option fee, there isn’t the possibility of a refund – though some sellers may generously give it back, the contract specifies that if you back out, they have the right to keep it.

Can You Rent to Own with No Deposit or Option Fee?

You can rent to own without a monetary option fee, but you should always have to pay an option fee. The option fee is what grants you the exclusive option to purchase the home until the end of the lease term.

Without an option fee, the seller could turn around and sell the property to a different buyer at any point, and you’re basically just a tenant.

However, you can give an option fee that isn’t comprised of cash. Some people offer the seller a service or a product of high monetary value instead. For example, the buyer might offer to make extensive repairs on a different property that the seller owns in exchange for a 7 percent option fee. Or the buyer might trade a boat for a 5 percent option fee.

Note: if the buyer and seller arrange this sort of deal, it becomes the seller’s responsibility to place the value of the product or service in an escrow account that the buyer will benefit from in the case the home is purchased.

For example:

Bill, the buyer, is purchasing a $100,000 home from Sam, the seller. Bill is a reputable electrician and typically earns $100 an hour for his work. Bill offers to provide Sam with 40 hours worth of electrical work in exchange for a 4 percent option fee. Forty hours is a lot of work, but Sam knows he wants to renovate the barn in his new backyard into a home office and could use Bill’s services, so he agrees.

This doesn’t mean that Sam is getting free labor. He’ll have to come up with the $4,000 worth of labor that Bill is putting into renovating the space and put it into an escrow account, because Bill is entitled to that money if he chooses to purchase the home.

Can You Rent to Own Without a Deposit?

If you’re taking the concept by its definition, there is not inherently a deposit associated with rent to own; therefore, you can rent to own without a deposit, but you will have to pay an option fee.

If you are considering option fees and deposits as the same concept, then you cannot rent to own without a deposit. You must always contribute some sort of an option fee in a rent to own deal whether monetary, service-based or product-based.

Our Front Yard by David23 is licensed under CC BY-SA 2.0.

Marty Orefice

About The Author

Marty Orefice

Martin Orefice is a real estate investor who has been in the industry for over a decade. He has experience with rent to own deals from all sides—as a buyer, seller and investor. He created RentToOwnLabs.com to provide the #1 resource where people can find information about all things rent to own.

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