What Is a Fixed Price Purchase Option?
A fixed price purchase option is the right, but not the obligation, to buy a leased item at the end of a lease term at a price determined from the onset of the lease agreement. A fixed price purchase option’s purchase price is established when the lease terms are set.
The lease agreement should also describe when the option can be exercised. This agreement usually sets the timing to occur at the end of the scheduled lease term. These terms typically range between 12 and 60 months.
- A fixed price purchase option is the right to buy a leased item at the end of a lease term at a pre-determined price.
- The fixed price purchase option’s purchase price and conditions are established when the lease terms are agreed upon.
- Fixed price purchase options are common for the leasing and purchase of real estate, heavy equipment, or automobiles.
- The advantage of the fixed price purchase option for the lessee is that the lessee knows with the cost to purchase the property.
Understanding Fixed Price Purchase Option
Various property types come with a fixed price purchase option, but such options apply most commonly to the leasing and purchase of real estate, heavy equipment, or automobiles. A common variation on this arrangement is the sort of lease option offered by mobile phone companies.
Phone company leases allow customers to lease certain phones for a period and, when the lease term ends, either trade in the phone for a new one, or pay the total value of the phone, which is set at a fixed price at the beginning of the lease term. The advantage of the fixed price purchase option for the lessee is that the lessee knows with certainty what the cost to purchase the property will be.
Fixed Price Purchase Option vs. Fair Market Value Purchase Option
In contrast to a fixed price purchase option, a fair market value purchase option gives the consumer the option to purchase the leased item at the end of the lease term at a price based on the item’s fair market value at the time of the lease’s expiration.
The main drawback of the fair market value purchase option is that the consumer will not know in advance how much the purchase price will be. However, while the fair market value purchase option does not offer the purchase price in advance, as long as the assessed fair market value is accurate, the buyer need not worry that they will overpay for the property. Similarly, the lessor need not worry that they will receive less than the item’s actual value.
When given the choice between the two buying options—fixed price or fair market value—a consumer should consider the property type. A fair market value option, for instance, is a good choice for companies leasing equipment such as security systems, servers, computers, and other technology-based equipment. Technology changes so rapidly that consumers attempt to avoid equipment that will become obsolete in a few years. Consumers buying equipment with longer life cycleson the other hand, may choose the fixed price option, although they may end up with a higher monthly lease payment.