Information About Property Lease Options in the UK from Mark Ford, Property Investment and Finance Director of Pooleford Property Services & Investments Limited.
I have been a property investor and property developer since the spring of 2005, and if you were to include the houses I have lived in over the years, you could say that I have been buying and doing up houses since 1985, that’s a long time!
However, I have always thought that you either buy a house to live in, or you buy a house to renovate and sell on or rent out.
It wasn’t until I took on property investment seriously as a business in 2006 that I learnt about property lease options, which are ideal for a depressed property market.
A very interesting concept! – no deposits needed, no mortgage applications to make, and great for business cashlow.
There are many benefits to property options, I discuss these further below. One main benefit of a property lease option is that you can take control of a property and free up the property owners from their problems! A win, win situation for all involved!
So, What Is A Property Lease Option, Mark?
Lease options, or more specifically property lease options, are a fantastic property investment strategy. As I have said, there is no need to go through the tedious process of obtaining a mortgage and you can get into the property, depending on the circumstances, from as little as a £1 option fee.
You take out an option to purchase a property over an agreed period of time in return for the payment of an option fee and the option price.
Note also… that when we refer to a property lease option, this is a tenancy combined with an option to purchase. The person holding the option is the option buyer and the person giving the option is the option seller.
You allow someone to rent (or sell) a property you own and also give them an option to buy the property from you.
The option agreement gives you absolute control over a property and the right, but not the obligation, to buy the property.
The Option Price
The option price is the agreed price that is to be paid for the property at any time within the option period, which I tend to take out for a period of between three to five years.
When the option is exercised by sending a letter to the property owner, the owner must sell the house and the buyer must buy the house at the agreed option price.
If the house is not purchased during the agreed option period, the property reverts back to the owners to dispose of, or use, as they wish.
The Option Period
The option period is the period of time that the property owner gives you to exercise the option to purchase the property.
It maybe the case for example, that the property owner does not need to take the capital out of the property now, that the property market is not the easiest to bring about a quick sale, and the seller wants to emigrate to Australia now, rather than later.
Perfect, the person who holds the option takes control of the property on behalf of the owner, releasing the property owner to emigrate to Australia. The option to purchase the property can be exercised at a time when the property market is more fluid.
The option holder can exercise the option at any time during the option period, say any time up to five years, has the exclusive right to rent out or sell the property on behalf of the owner in the interim, and can sell the property and arrange for the funds to be sent over to the seller in Australia.
The Option Fee
A property lease option will not be legal without some form of consideration passing between the owner and option buyer. This can be anything from £1 to any amount that is agreed between the parties to the option deal.
Let’s say that the property seller has a £5,000 credit card debt. You may agree that you will pay a £5,000 option fee, to be deducted from the future sale price, and that you will use the £5,000 to pay off the property owners credit card debt.
The owner moves on with life, getting on with whatever it was that was causing a quick sale of a house to be necessary. You take over the house as the property manager and rent it out in the short term, arranging for the sale to take place during the option period.
What Legal Documents Have To Be In Place For The Property Lease Option?
This will be sorted out by the solicitors but the documents that have to be executed are;
- Property option agreement
- Property management agreement
- Power of attorney
- Property inventory
- Property lease, where applicable
Property Option Terminology
You will hear a lot of different words used for property options or property lease options. Some of the phrases listed below you may have already heard used when discussing property lease options.
- Rent to buy
- Rent to own
- Lease option
- Lease to own
- Lease purchase
Property Lease Option Benefits – Buyer
- Price locked in now
- Benefit from future price rises
- Property usually obtained at current market value or just below market value
- If you rent the property, pending buying the property under the option, then you get into the habit of paying monthly rent just like you would when you pay a mortgage
- Settle into a property and try before you buy
- The lease option is not like a traditional property rental. You hold a lease option over a longer period of time, usually up to five years which gives you more security
- No need to get a mortgage now or produce a large deposit
Property Lease Option Benefits – Seller
- Option fee can be a cash lump sum by way of a deposit
- The rent can be more than the market rent improving cashflow
- Very bespoke property option deals can be negotiated to fit most circumstances and solve many property problems
- Provides a clear exit strategy where the financial outcome is known within a set period of time. I find that three to five years is the norm in a market where sales are slow
- Retain long term tenants on the lease option who can be responsible for maintenance, rather than you
- Tenant buyers take care of the property better because one day it will be their own home. They will be exercising the option to buy the property
- Property lease options can be arranged in a matter of days
What Does It Cost To Set Up A Property Lease Option?
In my experience, you can take control of a property for as little as a £1 option fee and for the property option solicitors to put all the legal paperwork together it will cost you in the region of £1,000.
That seems hard to believe doesn’t it? … but I assure you that I (Pooleford) have done just that and taken over a country cottage for £1,001.
Property Option Example 1 – Pooleford Property.
Why would the property owner do that? - because it is not about the £1 option fee but more about being freed up from the hassle and stress of having to look after the property and pay the running costs, when the focus is more on getting on with life now and not later.
The property owner is also released from all financial obligations over the property and this is more important to them than negotiating a high option fee. The property lease option holder carries the financial responsibility for the property during the option period. If a bill arises, the property owner says… “You pay it, that’s your job!”
To maintain the privacy of the client I will not reveal the exact details but in the case of the country cottage, shown above, the owner operated as a landlord and he was having difficulty getting the property rented out.
The rental void was causing severe financial loss to owner and Pooleford was approached to see how we could help.
We now hold a five year option over the property where;
- We pay the owner an agreed monthly guaranteed rent
- The option fee was £1
- Owner pays the insurance
- Option price agreed to pay at some point during the next five years
- Property has been consistently rented out pending a future sale
- Pooleford takes any rise in the market above the agreed fixed purchase price
- Property owner gets the agreed fixed sale price within the five years
- Pooleford are responsible for collecting the rent, paying the owner the monthly payment and all maintenance and repairs to the property during the option period
Property Option Example 2 – Pooleford Property.
The property seller could not sell the house on the open market and needed to move on and get a quick sale.
- Pooleford obtained an option to buy the property over five years
- Pooleford rent the property out as the property managers
- Pooleford pay the owners mortgage, insurance and all running costs
- Future purchase and sale price agreed
- Option fee agreed at $1
- Pooleford paid legal costs
Property Option Example 3 – Pooleford Property.
Pooleford contracted to carry out a property finding service in Bradford, Yorkshire, UK. Property successfully found near the University and purchased for the clients daughter – see the testimonial – daughter marries and moves out of the property.
Property owner does not want to be responsible for the property pending improvements in the UK property market.
The property prices are currently suppressed and it is difficult to sell the property.
Property Option Solution:
- Three year option deal – gives time for market conditions to change
- Monthly fee paid to owner
- Pooleford rent out property during the three years
- Future sale price agreed
- Pooleford responsible for selling the property during the option period and paying for all maintenance issues
Pooleford Property, Mark Ford and Liz Poole, wish you every success with your own property lease option deals.
If you are having difficulty selling your property, you do not need the capital out of your property straight away, you live in the UK and you would rather move on with your life now, complete the contact form below and leave us with some details of your situation so that we can see how we can help you.
Property Investor – Buying A Property On An Option:
If you would like any assistance with putting the property option deals together, or you would like to consider using our legal services to put in place all the documentation you will need, including placing a restriction on the title to the property, please complete the contact and enquiry form below.
Comments or questions are welcome.
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I wish you every success.