Lease Options are an ideal way for landlords to sell their Buy to Let properties which have negative or little equity.
So what exactly is a Lease Option (Protected Lease)?
• A Lease Option (Protected Lease) is a contract between a vendor (seller) and a buyer which gives the buyer the use of the property from the date of signing the agreement.
• The attraction to a buyer of doing a lease option is that they can effectively get on the housing market without having to pay Buy to Let mortgage deposits which are currently a minimum of 25% because they are utilising your current finance with your mortgage company to do it.
• A buyer will look to rent your property out and make money on the rental income and the property increasing in value over the option period. Generally option periods are between 5-20 years. The buyer will have the right but not an obligation to buy the property in the agreed option period.
Key bullet point facts with a Lease Option (Protected Lease)
- The deal must have a fixed price and a fixed time frame for the buyer to have the option to buy.
- The buyer can purchase the property any time within the agreed time frame.
- The buyer has a right to buy but not an obligation.
- During the option period the option holder (buyer) takes on responsibility for the property and pays a monthly fee to the vendor.
- General practice is for the buyer to gain a power of attorney with the seller’s mortgage company so they can pay all mortgage payments direct. This is the same for the buildings insurance. The reason why a buyer will pay the mortgage company direct is to stop a seller keeping any monthly payments and not paying the mortgage. Vice versa, you will be able to communicate with your mortgage company to confirm that each month the buyer is paying your mortgage. As part of the terms of the option agreement, if the buyer defaults on a mortgage payment at any time, the option agreement would end and the property would go back in control to the vendor (seller).
- The buyer will pay their own legal fees and a fee to NGU Homelettings to facilitate an option agreement. It is therefore in their best interest to make an option agreement work because they will have paid an initial outlay to enter into the agreement. Also the buyer is doing this option because they want to have the opportunity of your property going up in value in 5-20 years’ time, allowing them to make money on this increase in value.
- A typical term that a buyer will put in an option agreement is that when the property is sold, the seller will get 10% of any increase in value. By having this clause it gives a more ethical agreement to allow both parties to have a win win solution.
Benefits to you-the vendor (seller)
Peace of Mind
- The legal arrangements are handled by solicitors.
- There is a fixed period, agreed at the outset, within which the sale may complete. Typically this is 5-20 years.
- Contracts protect the interests of the buyer and seller and are binding.
- NGU Homelettings has a wealth of experience of facilitating deals in this way, and an outstanding reputation as a provider of innovative, practical and ethical property purchasing solutions. We will be fully involved in the process to make sure it runs smoothly and once the lease option has started, as part of the agreement we will still manage the property during the agreed option period. By having this clause in the option agreement it gives you a peace of mind that we are still involved in the process from start to finish. Therefore we can make sure the new landlord of your property is still putting good tenants into your property and is on top of the maintenance involved in the day to day running of letting a property.
- The seller is free to move on.
- The Protected Lease Option arrangement has helped many who may otherwise have lost the property in the face of changing personal circumstances or are “reluctant landlords” and no longer want to be a landlord.
- The seller will no longer be responsible for paying the mortgage payments during the option period.
- The buyer (new landlord) is responsible for any maintenance issues that arise in the future-the seller is maintenance free.
- Completion can be timed so that the seller avoids early redemption penalties or mitigates Capital Gains Tax, making an otherwise difficult sale financially viable
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