Described as the Power Steering of property investment, Options are powerful problem solvers and cash-flow creators. Though not suited to all situations, they are transforming the way investors view and transact residential property in the UK. They can fast-track you to financial freedom.
Property Options in Brief
Purchase Options, Lease Options and Sandwich Options are becoming familiar terms with Property investors. Perhaps you are already using these powerful legal agreements to add to your portfolio, to generate cash-flow, to sell property which might otherwise stick, or to secure your family home.
Understanding Property Options and using them with skill is important. Why? Because Options can open locked doors, or become trap-doors.
Property Options in Essence
An Option gives choice and freedom. Depending on the wording of the document, a Property Owner (Optionor or Grantor) grants exclusive freedom to buy, use or sell the Property, or a combination of these freedoms. The Buyer (Optionee) can choose to buy, or not to buy during the term of the Option. Should the Buyer wish to buy, the Seller must sell. That is the essence of an Option.
Essential Ingredients of Option Agreements:
- a willing seller;
- a written document;
- a specified period of time;
- an option fee;
- a purchase price; and
- a willing buyer.
Property Options fall broadly into two categories;
- A Purchase Option is often short-term and grants the holder the freedom to buy the property at an agreed price within a specified period of time.
- A Lease Option is a Purchase Option together with a lease giving the added freedom to use the property during the term
A property owner may grant a Lease Option to a tenant, (the tenant now has an Option to Buy) allowing them time to save a deposit, arrange finance, add value to their home and or wait for the property to appreciate before buying. This “tenant buyer” can choose the best time to “exercise the option” and buy. This is known as ‘Rent to Own’, or Rent to Buy.
When two Lease Option agreements run at the same time we have a Sandwich Option or Double Lease Option. The property owner grantsan investor a Lease Option and the investor grants a second Lease Option to a tenant buyer. This effectively means the investor can control property and sell it without even owning it.
Property Options in Control
Option holders who take a property on a Lease Option will make a regular payment to the Owner or pay the Mortgagees direct on their behalf. This is a bit like piggy-backing to get through a muddy patch.
Lease Options can help these people move on;
- Tired Landlords
- People who need to relocate
- Divorcees and others who have separated
- Home-owners struggling to maintain mortgage payments
They can help these people move in;
- First time buyers
Options are not without risk. This is generally limited to the Option fee (a payment making the Option binding at the outset) and any costs incurred during the Option Period. You need to be sure your Option Agreements are properly drafted, that they are fair and transparent, otherwise you may not be able to exercise them.
Options should create cash-flow, since the monthly payments to the Seller or the Mortgagee would be lower than payments taken as rent. If property prices increase, you also benefit from the capital growth.
Property Options in Practice
Option agreements can provide relief for homeowners in many situations. Take Ms D and her partner. They own a two-bed semi with a conservatory and well kept gardens in a good part of County Durham but had moved 40 miles away to settle in a rural location. They were unable to sell the house. Concerned about vandals and burglars their quality of life was suffering. Unwilling to become landlords, they were paying £490 a month for an empty house.
Rather than allowing the situation to spiral out of control, they granted a 48 month Lease Option with the purchase price set at £97,000; less than the marketed sale price. We contribute £300 a month, which covers the interest on the mortgage. An excellent tenant cares for the property. We benefit from a modest £120 profit a month.
We intend to buy the property when the market recovers. If it doesn’t, we will negotiate an extension with Ms D, or allow the option to lapse or expire. In this case, and by mutual agreement, the house will be returned in excellent condition. We will have benefitted from the cashflow, and Ms D will have had 4 years of peace of mind.
Rent to own goes a step further. It is a simple arrangement allowing a tenant to live in the property, paying rent in the usual way. In addition the tenant has a legal document giving them the right to buy the house within an agreed time period at a set price. Tenant Buyers tend to be people who can’t get a mortgage immediately, or don’t yet have the needed deposit, but have a strong prospect of securing finance in the future. The money paid when they move in, together with the monthly instalments, goes towards creating their deposit.
Imagine you own an investment property which owes you £100,000 and the value now is closer to £90,000. With an Option you might set the future purchase price (to be paid within, say, 48 months) at £110,000. When your tenant buyer moves in you collect an Option Fee of 3-5 per cent of the agreed purchase price; collect market rent and monthly instalments of up to 20 per cent of the rent. When the Tenant Buyer decides to exercise her Option and buy, the Option Fee and monthly instalments become the purchase deposit.
Selling to a tenant-buyer in this way has many benefits. Late payments and void periods are extremely rare. The responsibility for day to day maintenance and improving the property lies with the future buyer who takes pride in his home. This home-owner mindset safeguards your cash-flow and frees you to focus on other aspects of your business. Giving back to the community by helping local families own good homes is rewarding.
Property Options and You
Option Agreements are transforming the way we buy and sell property in the UK. You can control a substantial portfolio without the need for personal mortgage debt or liability. Hard pressed landlords can re-organise their finances and transform portfolios. Through Rent to Own, Property Options are opening doors for potential home-owners when finance is not readily available.
Investing this way may well be an Option you can’t refuse!