An Alternative Exit Strategy
Lease Options are an ideal way for landlords to get rid of the cost and hassle of a rental property if they are unable to sell due to negative or little equity.
What are they?
- 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 the seller is they will receive a guaranteed monthly lease payment which should cover their mortgage and insurance so there will be no ongoing costs.
- The attraction to the buyer is that they will effectively get a Buy-to-Let property, without having to pay a mortgage deposit, which is usually 25% of the purchase price, by utilising the current finance on the property.
- The buyer will look to rent the property and make money on the rental income as well as any increase in value over the option period. Generally option periods are between 5-20 years.
- The buyer will have the right but not the obligation to buy the property in the agreed option period for a pre-agreed price. So the buyer will have a financial gain from any increase in value of the property.
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 the obligation to buy.
- During the option period the option holder (buyer) takes on responsibility for the property and pays a monthly fee to the seller.
- 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 to the seller’s control.
- The buyer will pay their own legal fees and a fee to ourselves for facilitating the option agreement. It is therefore in their best interests to make an option agreement work because they have paid upfront to enter into the agreement. Also the buyer is purchasing the 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 allows a more ethical result and allows both parties to win from the final sale.
Benefits to you – the 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.
- We have 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 peace of mind that we are still involved in the process from start to finish. Therefore we can make sure the new landlord is still putting good tenants into your property and is on top of the maintenance required in the day to day running of it.
- 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.