This basically means you are leasing or renting a property with an option to buy it at a future date. The future price of the property should be fixed at the time the lease-option is signed.

Usually there is an up-front payment of some amount to purchase the option. The amount can vary. Sometimes the monthly payment is larger than normal and the excess is used to purchase the option. In some cases, the option money can be applied toward the down payment for the later purchase of the home.

Lease-options are usually done during a slow real estate market. During a hot market, the seller can simply sell the home in the regular manner.

The best way to explain it is through an example:

A couple got involved in a lease-option some time ago, just before the real estate market turned. As a result, by the time the option was about to expire the home was worth much more than the option price. They exercised the option to buy and sold the house in a double-escrow, pocketing a tidy sum. Of course, they could have simply bought the home, but they still could not qualify for the home loan.