If you’re new to property, you might not have come across lease options. You might not have heard of this phrase. It’s quite a niche strategy that isn’t really common knowledge. It’s very much an example of an advanced deal structure.
When negotiating, we can negotiate on both price and terms. A lease option is an example of the latter where we negotiate on the terms of the deal. You can’t usually just get a lease option by walking into an estate agent’s office, you need to create these types of deal by ideally getting direct to the person – selling direct to vendor.
A lease option is a way to control property without actually owning it. So, it can be used by an investor if they’ve got bad credit for example or they don’t have access to funds or private investment.
The key to putting options together, is purely knowledge. The principle of a lease option is similar to PCP on a (car personal contract purchase) – you have to make some form of down payment. This can be as little as one pound if the vendor circumstances allow it to be. You might have heard the phrase ‘buy a property for a pound’ and this is where it comes from, but there’s more to it than just one pound.
On top of this, you need to agree a time frame with the vendor. During which you can buy the property from them and the price at which you can buy it for. What’s normal between the time you set the option up and the time you actually buy the property, is that you pay the vendor a monthly payment. Now this might be their existing mortgage on that property, or it might just simply be effectively paying rent on it until you buy the property from them.
One of the key benefits of an option, is the ability to control the property, until you choose to purchase it. You as the investor have the option, but not the obligation, to execute on the deal. This means if the value increases, you’ve already agreed to buy that property at a below market value price. However, if values go down over time, you’re not obligated to buy it. So, you can walk away from the deal or renegotiate the terms.
Once you’ve agreed the lease option on the property, you can do whatever you like on it. You’re very (very) flexible. You could turn it into a buy to let; you could turn it into a social housing deal; you could create an HMO from it; you could live in it yourself if you wanted to; you could flip it on – there are multiple options.
You need to have a great team in order to structure options, as they’re not that common. So, a bog-standard high-street solicitor can’t always put these kinds of deals together – they might not even know what they are.
Not every situation will lend itself to an option. So, it’s very important to understand what can be quite a complex way to actually structure a deal. You need to know the various situations in which it can be used, the right time to bring it up in negotiations, and understand the positives, so you can demonstrate that to a vendor when discussing it with them.
A lease option can be very (very) flexible so there isn’t a one-size-fits-all way of actually piecing a deal together. The key to putting an option together is having a great depth of knowledge, having a really good set of negotiation skills and having the right team at your disposal.
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