When purchasing a home, one occasionally hears about the possibility of “renting with an option to buy. ” This arrangement can take various forms, but a common one is that the renter simply pays rent and may purchase the house at an agreed-upon price. Rental payments typically are not applied toward purchase. The owner is not permitted to sell the house to another buyer unless the renter/option holder waives the right to purchase. The duration of the option mayor may not be specified.
Suppose that a buyer is considering whether to purchase a house outright or rent it with an option to buy. Under what circumstances would renting with an option be a dominated alternative? Under what circumstances would it definitely not be dominated?