A lease option is the ability to create a contract to buy a house while you lease it so it does not sell during the term of the tenancy. 

Usually there is a cost.  The owner is prevented from selling to anyone else.  You are buying the owners right to sell to anyone else during the option period.

Usually the funds are non-refundable because you are buying the ability from the seller to sell it.  Sometimes the some or all the option amount is applicable to the purchase price.  This is a negotiated feature.

The lease option has two parts:  a lease and an option document.  The lease is pretty standard but the option document is similar to a sales agreement in that it contains some of the terms of sale.  It is recommended that some kind of more complete sales agreement is prepared for use so that the other terms that are normally included are identified. 

These terms are negotiable however the following serves as an example.  A lease may be entered into for a term of 1 or more months or years for a monthly rental amount.  The lease refers to the option agreement somewhere in the text and should refer to a point at which the lease obligation terminates.  The option agreement need not be lengthy but refer to the lease and specify the terms of purchase.  Included are the purchase price, finance terms, date the option must be exercised (usually the same as the closing date), and other terms that are important.