Article written by David France
1.Control a property for £1
You may have heard the phrase ‘Buy a house for £1’ well this isn’t quite true, but you can take control of a property in England and Wales (Not legal in Scotland) using just £1 meaning you are leveraging someone else’s asset they put a deposit in to meaning you get to build a portfolio with virtually NO money down! – Just legal fees are required to complete the transaction.
Did you know what paper work makes up a lease option?
Paperwork required to secure a lease option:
Heads of terms (H.O.T)- This is the agreed terms of the deal i.e. purchase price, term, monthly payments.
Letter of authority (LOA)-This must be used to check the numbers and confirm the financials DO NOT TAKE THE SELLERS WORD FOR IT
Management agreement– this states the duties from the buyer and seller i.e. payments will be made on time every month by the buyer.
Option agreement – States the agreed future purchase price this is fixed today.
Power of attorney (POA) – This document covers the ‘what if’s’, such as death, Bankruptcy.
Equitable mortgage (Optional)– This document few know of in the property game and this is designed to protect any equity (if any) in a property you have on lease option.
RX1 restriction – This document allows you to put a restriction on the owners title of the property which prevents them selling the property without you knowing, this is VITAL.
2.Stay in the deal as a supervisor
Most people do not know you can actually sit in the middle of a (Lease Option)‘seller’ and a incoming ‘buyer’ and ‘supervise’-benefits of this are huge, if the property gets handed back you can sell it again, or keep it your self, basically you get many bites of the apple if the property is even returned plus you have more control over the deal.
Brief example below
‘The supervisor’
Option consideration £1
Purchase price £100,000
Length of option 10 years
Monthly payment £200
We then package this up and sell to an investor (buyer) who we
Give on the below terms
‘Investor’ (buyer)
Option consideration: £3,000
Purchase price £110,000
Length of option: 5 years
Monthly payments £300
So you can see we have created cash right away from this deal by getting cash up front (£3,000), every month (£100 on top) and in 5 years we get this back if they don’t exercise the option to buy; if they do we make £10,000 as well.
3.Buy at any point within the option term
You can exercise the option at any time during the option term and buy if you decide to.
4.You can sell the contract
You can sell the contract on, as most lease option agreements are assignable.
5.The new tax changes will NOT affect the lease option holder
Most people are fearing the tax changes as the mortgage interest relief will be abolished going forward over the next few years, meaning it will push some tax payers in to higher rate tax payers- using a lease option means the ‘lease’ payment is still a tax-deductible expense and NOT classed as a mortgage payment even though we cover the mortgages in most lease option arrangements.
6.No deposit needed
Most mortgages on a buy to let property mean a hefty 25% deposit is payable, on a property worth £100,000 this is a whooping £25,000- That £25,000 means you are restricted and tied in to that property with the risks of house prices falling then been in negative equity and many other issues- with a lease option no deposit is required.
7.No credit checks required
Un-like mortgages no credit checks are done on the investor (buyer) coming in on a lease option, as if they default on any payments they loose the deal, this is ideal if you have bad credit and no longer able to get mortgages- You can still profit from property.
8.Fancy a hotel?
Lease options can be done on Hotels, think Donald Trump he has done lease options on a grand scale using them to control sky scrappers- They can be applied to Land, Commercial, Residential assets-So think out side the box and look at what you can control to profit from.
9.Get creative- Lease option to Serviced accommodation
The big craze right now is serviced accommodation so why not use your lease option as a serviced accommodation business enterprise and triple your profits! Most investors think you can just single let a lease option well this is not the case you can use the property as you wish as you have the sub-let ability in the management agreement. (Note please check the mortgage T+C’s before running as a serviced accommodation as this can be in breach)
10.Low risk
You are just risking your £1 with a lease option and you have HUGE up side, capital growth and cash flow. Build a portfolio of these and you will have some great passive income coming in and future capital growth.
11. Negative equity? No problem
If you find a property that is up side down, meaning in negative equity and a seller wants out then you can still agree to buy the property in the future for an amount more than the value today
E.g.
Market value £100,000
Seller owes £110,000
You agree to buy at £110,000
The real value is how long you can agree the term of the lease option for i.e 10 years
12.Walk away from the deal if it doesn’t work out
If the lease option starts to loose you money you can exercise the option to walk away under the terms of the agreement, this would only be in extreme circumstances. If you did this to a mortgage lender do you think they would let you just walk away from it?
13.Sandwich anyone?
You can do some really clever stuff with lease options which we have covered above, one other thing you can do which is extremely profitable is put a tenant buyer in a property, which is known as a ‘sandwich option’
E.g.
Lease option agreed with a seller
Option consideration £1
Option to buy price £100,000
Monthly payment £200
Term 10 years
Instead of just putting a tenant in we advertise for a tenant buyer terms below
Sick of renting? Rent to buy this house
£5,000 gets you in
Option consideration £5,000
Option to buy price £129,000
Monthly payment £600
Term 5 years
Doing the deal above means you get no void periods, as they want to own the property, they also do the repairs so this cuts down on our costs. The profit to us is £400 per monthx60 months (5 years)=£24,000 plus £5,000 up front meaning you have made £29,000 profit from this deal that you do not even own!
14.International lease options anyone?
Not only do we do these lease options in the UK we also do them internationally. People have property problems worldwide and with the Internet we have access to them from the comfort of our home-Maybe if you like travel or fancy a cheap holiday home then go find a motivated seller.
15.Work with MOTIVATED sellers
These deals we do on lease options only work with MOTIVATED sellers, as most people will want to sell right now, but not everyone has to sell right now even if they think they do, so buy asking the right questions you can see how motivated they are and if they don’t need all the money right now then a lease option may work well.
E.g.
If someone is in negative equity and they are trying to sell the property then you know they are not going to make any money from the sale so why not offer a lease option, as they probably just want the mortgage payments taking care of.
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