How To Do Lease Options
Lease Options Home Study Course - Learn How To Buy Property Without Mortgages & Deposits Even If You Have Bad Credit.
Lease Options have been around in the UK since the early 2000s however as it was easy to obtain finance during this period a lot of investors bought property with mortgages. Since then obtaining finance has become a lot more difficult and over the last few years investors have found an alternative method to acquire and invest in property – lease options.
Lease options were originally a method to finance property transactions in America in the late 1970s and early 1980s at a time when prices dropped significantly and it became difficult for buyers to get finance to buy property.
Nuts and bolts of a Lease Option
• The buyer pays a sum of money to a seller for the right to purchase a property at a later date. This option money is agreed between the seller and the buyer and can be as little as just £1
• The buyer and the seller will agree a purchase price within specific period of time, it may even be that the buyer pays market value or higher than market value at the time when the option is exercised. In a downward market investors will want an option price which is slightly below today’s market value. In a rising market, an investor may be willing to take a risk and offer to pay higher than market value for a property.
• The buyer and the seller will agree a monthly payment that will be paid to the seller. In most cases this monthly payment will be 70-80% of the market rent but sometimes can be higher.
• Term of the option agreement is most commonly short in a rising market typically from one year to three years however in a downward market the term is much longer and can be anything from three years to five years and sometimes much longer.
• Option fee paid for the right to buy a property is non-refundable
• The seller is not allowed to refinance the property or sell the property to anybody else during the option period.
• If the buyer does not exercise his right to buy a property within the option term the buyer will lose his option fee and lose the right to buy the property at the pre-agree price.
• There is no obligation for a buyer to buy the property
Lease Options Home Study Course
How The Investor Profits
Once an investor has agreed a lease option the buyer can sell the property on a lease option to a tenant buyer. A tenant buyer is somebody that will buy the property but until he exercises his option he will be classed as a tenant. The only difference is that in most cases, he is treated as the owner and therefore is responsible for the maintenance and repairs.
The investor will commonly sell the property on a ‘rent to own’ or ‘rent to buy’ scheme.
An investor will sell the property on terms which are shorter than the terms agreed with the original seller.
For example, an investor may have agreed to pay £100,000 on a property worth £115,000 in five years and a monthly rent of £500.00
The investor may sell the same property to a tenant buyer for £120,000 on term of three years and a monthly rent of £650.00
The difference between the price paid and price sold by an investor is his profit and this is the same for difference in monthly rent.
The option fee the tenant buyer pays the investor is normally credited toward the buyers deposit and in most cases so is a portion of the monthly rent. This is done to make it easier for the tenant buyer to buy a property when it’s time for his option to be exercised.
Lease Option Benefits for Sellers and Buyers
Lease option transactions are structured by investors with motivated sellers. Why? This is because if a property was easy to sell then it would be much easier for the seller to sell it on the open market to a conventional buyer. Motivated sellers include people that may have lost their job, people facing repossession, etc.
An investor’s strategy is normally to get a property on the open market and either:
A) Sell the property to a tenant buyer on a rent to own scheme.
B) Sell it on the open market after adding considerable value. For example, splitting a large Victorian property in to flats
C) Rent the property to a conventional tenant and benefit from the extra cash flow. This can be an extremely profitable strategy however the investor must be aware that he will be responsible for late rent, possible arrears and maintenance. The advantage of this strategy is that the investor can benefit from significant cash flow and of course control and own a property without getting a bank loan.
Typically those that would consider a property on a rent to own basis are those that may not be able to qualify for a loan as they may have bad credit, they may not have a big enough deposit for a bank loan or they simply may not of been in the country long enough to qualify for a bank loan.
A tenant buyer buying a property on a rent to own basis gets to experience the benefits of home ownership by locking in a price but also gives them breathing space to repair any bad credit issues they may have or time to save for a deposit.
Lease Options Home Study Course
To learn how you can profit by using lease options to purchase property click here.
