Property Lease Options – A Dying Investment Strategy?

 

 

Using lease options to control property has grown to become an investment technique being used popularly around the country – particularly as a consequence of stringent BTL finance rules impeding many business growth strategies.  As what was to be expected, many have either been sceptical about their medium to long term effectiveness or pointed to the fact that there is no tangible ownership being a major negative.  Nevertheless, for the time being, their use is likely to remain and so we therefore chatted to one the UK’s thought leaders on the topic – Mark Jackson of Lease Options Made Simple – on a number of subjects including legal issues; the ‘fad’ argument; benefits / risks; potential FSA intervention and protecting future interests amongst others.

 

1) Can you give us a bit of an outline about your experience and why choose to set up ´Lease Options Made Simple´? I fell in love with property at the tender age of seven. It was then my parents bought our first family home, which we renovated, lived in and sold. Later, when I was 14, we bought a heavily wooded plot of land and lived in a caravan for two years while we built our home from scratch. The whole experience taught me some important lessons about life and that over time property can be a great way to invest and create wealth.

When I returned to the UK after ten years of voluntary work in poorer countries in 2004 I was determined to become financially free, and was convinced that property was the best way for me. I set about learning how I could acquire a portfolio of investment property without huge amounts of cash. In fact, at that time, I had no credit history at all, and even less cash.

In 2006 I used a property option to secure and buy the tiny flat I was renting in Richmond, North Yorkshire. Then I started building a portfolio, buying property from other investors and home-owners using property lease options and other advanced purchasing techniques, like seller finance. I loved the problem-solving power of property lease options, and I found it very easy to negotiate and structure deals with motivated sellers. I wanted to share my experience, since lease options had liberated me from a struggle to make ends meet to no longer needing to work, and in a short time.

2009 saw the interest in lease options in the UK increase sharply and it was then I approached Wendy Patton to discuss the possibility of creating Lease Options Made Simple. Wendy has enormous experience with lease options in the US (more than 24 years of investing experience and over 650 deals personally agreed) and this rich experience, longevity and a refreshing approach to motivated sellers really appealed to me. We formed Lease Options Made Simple in 2010 and thoroughly enjoy working together.

The use of lease options to aquire property – particularly since investors have had increasing difficulty in undertaking no money down – has grown in popularity in recent years.  Are they really a viable strategy in the modern day property investment market or – as some have debated – a bit of a ´fad´? You make an important point here. In my experience it is only those who have yet to enjoy success with lease options who call them a ‘fad’. Without being offensive or derogatory, comments like that make me think of the Aesop’s fable about the fox and the grapes…So I suppose whether you consider lease options a fad or not would depend on your experience with them. Viability is in my mind a question of availability, sustainability, longevity and security. Do lease options done well meet those criteria? In my opinion, yes. Why? Lease options give you control without ownership and at times when ownership is challenging, lease options are a viable, solid alternative. Wendy’s 24 years of lease options experience is a powerful answer to the question of viability.

What are the main benefits of building a lease option portfolio in 2011?

 

    • Freedom for investors to continue building a portfolio at a time when there is a sea of discounted property;

 

    • Existing finance is often cheaper than new buy to let products available often resulting in much better cash-flow at a time of a historically low base rate;

 

    • The number of properties you can secure is limited not by external factors, such as the availability of bank finance but by how many units you can find, manage and maintain;

 

    • The rental market is set to be strong in 2011, meaning fewer voids and higher rents, so now is a good time to work towards replacing an income from a job and take that step towards financial independence through property lease options;

 

    • Because you don’t need a new mortgage to get control of a property with lease options you are able to exchange more quickly and move on to the next deal.

 


What do you feel are the main reasons that some investors are against the strategy of lease options?

 

    • The poor quality of some of the ‘deals’ packaged and offered as investments. I’ve seen some being sold with negative equity, huge arrears, distressed sellers and dubious due diligence;

 

    • Sandwich options which rely on two lease options running Seller – Investor and Investor – Buyer are, in my opinion, unfair to both seller and tenant-buyer. When they are talked of as a viable strategy in the UK they do lease options a disservice. Why so? Sandwich options structured this way offer the tenant-buyer little or no security;

 

    • Lease options are still quite new in the UK and the advantages they can bring are so enormous, they could seem too good to be true. “There must be a catch;”

 

    • There has been a lot of hype surrounding lease options and clever marketing, and this turns some of us off. We have a limited number of experienced lease options investors in the UK who are actually writing lease options, and investors know when someone is talking from experience or selling courses. You can find lots of reliable information about lease options on our site:www.LeaseOptionsMadeSimple.co.uk;

 


What are the main strategies that can be used this year in order to ensure maximum profitability? For fast cash – cooperative options, where you cooperate with a seller willing to give terms and find a motivated buyer. In many parts of the country controlling property and tenanting while you wait for the market to show its hand is profitable. If you keep your options open you can always use a tenant-buyer strategy later if the market lifts and your optioned property is worth more.Always target property with equity and agree to have at least part of the monthly payment coming off the end purchase price.

What do you see as the main risks and how can they be minimised?

 

    • Having the seller made bankrupt, or declaring himself bankrupt;

 

    • A seller challenging the option agreement three years down the line on the basis that it is unfair or they didn’t understand what they were entering in to.

 


These can be minimised by avoiding distressed sellers, having a watertight paperwork system and making sure that the seller has adequate, qualified legal representation from the outset.

As with what happened with sale and rent back (SARB) a few years back – how long will it be before the FSA begin investigating lease options deals and what will be the implications of investors using this strategy? That’s a difficult one…You can be sure the FSA is already interested to some extent in lease options. Of course, it’s good to be running your options business as if it were already a regulated activity.The implications of regulation would depend on the level of control the FSA wanted to see imposed. These things are not retrospective, though, so any regulation would be unlikely to affect lease option deals already written.

Would you recommend undertaking lease options to a beginner in property?Yes. Why not? Beginners can do better with lease options than seasoned investors because they do not have the limiting belief “Why would anyone agree to this?” It is important to get good lease options education and have access to experienced investors for support. The first deal is always the most difficult.

Should a lease option portfolio building strategy always be combined with one of buying property in the ´normal´ way? If you can create wealth through control and without the burden of ownership, why would you ever need to buy in the normal way? If it is more profitable for now to piggy-back on somebody else’s existing finance, then that would be a good idea.

Of course, there are some advantages to ownership, but if you can’t get a mortgage, get started with lease options. There are some option properties in my portfolio I want to buy or sell on this year, possibly through a JV partner, just because they are such good deals and we are already well in to the option period.  I have already built up healthy credits and want to have that considerable created equity credited to me.

 

In terms of protecting the future interest in an optioned property, how can this be protected (many have criticised the legality of the contracts that have / are being put together)? There are certain fundamentals that every option investor will want to take care of to protect his interest:

 

    • Register the option with LR once paperwork has been exchanged;

 

    • Make sure you are using the latest lease option paperwork;

 

    • Make sure you have control over the mortgage payments and authority to talk with the lender on the seller’s behalf;

 

    • Tell the lender that you have agreed an option with the seller;

 

    • Don’t deal with distressed sellers – you are storing up future problems.

 

 

Just Do Property also did an audio interview with Mark Jackson and Wendy Patton.  They shared some great tips about working with Estate Agents to get Bargain Lease Option Deals:

 

listen


Click here to listen.

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