Definition from Wikipedia and the Dictionary of Real Estate Terms (6th Edition)
A lease purchase contract (or lease option contract) is the abbreviated form of the appropriate term lease with option to purchase contract. It is a form of real estate purchase which combines elements of a traditional rental agreement with an exclusive option of right of first refusal to later purchase the home.
These contracts are commonly used where a buyer wants to purchase a home, but due to credit issues would not qualify for a conventional mortgage and does not wish to, or would not qualify, for FHA or VA financing.
Under the typical terms, the tenant/buyer chooses the home and seeks a landlord/seller to serve as an investor. The tenant/buyer then agree to a lease period, during or after which the tenant/buyer has the exclusive right to purchase the home at a previously agreed-upon price. The tenant/buyer pays to the landlord/seller a non-refundable option deposit that is applied to the purchase price of the home. The tenant/buyer then pays to the landlord/seller a sum that is typical to the rental amount usually on a monthly basis, of which a portion of that monthly payment may or may not be applied to the purchase price of the home, but which normally covers the mortgage amount owed by the landlord/seller.
Should the tenant/buyer not wish or be unable to purchase the house, the tenant and landlord can agree to extend the option period, convert the lease purchase contract into a traditional rental agreement, or end the contract with the tenant moving out and the landlord seeking other renters or buyers.
Lease purchase and lease option could be considered different where a lease purchase uses a purchase agreement and a lease option may not and an option is a unilateral contract and a purchase agreement is typically a bilateral contract.
John (Homeowner) leases a property with a purchase option to Sarah. Sarah pays $1500.00 rent per month to John for 5 years. After 5 years Sarah can buy the property from John for the pre-agreed upon price of $250,000. If Sarah chooses to exercise the agreement, she can purchase the home for the agreed upon price, but she is not obligated to if she chooses to walk away after the 5 year lease term in up. At which point John would continue to retain title of the house and is free to do whatever he wants with the house.