The use of options to take control of property has only recently become commonplace strategy in the UK – particularly after the onset of the credit crunch. A lease option is an abbreviated form of the more formal term referred to as a ‘lease with an option to purchase’. In short, a lease option enables the buyer to enter a contractual agreement with the owner of an asset to take its control on the basis of the owner transferring the asset within a specific time frame for a specific price.
Options are used in various forms across a variety of financial transactions including in the stock market (often referred to as ‘futures’). Contrary to what is often stated, lease options have not been exported into the UK from countries like the USA and Australia but have existed for centuries – albeit solely within the commercial and land sectors. In land, the lessee (or potential buyer) usually takes an option for a number of reasons such as to ascertain its open market value; to ensure planning permission can properly obtained (and there are no encumbrances) and/or to buy time for the land to be leased. In commercial property, lease options allow corporations to evaluate operations on an ongoing basis prior to locking into long-term contracts (amongst several other uses).
Many see the main downside of lease options being the fact that the buyer does not take ‘ownership’ of the property which, whilst theoretically true, does not mean that these kinds of transactions should not be taken seriously. Below are some of the benefits of lease options:
- The commonly referred ‘below market value’ or ‘BMV’ strategy of aquiring property requires a certain amount of equity to remain in the property to facilitate a purchase. Lease options, on the other hand, enable investors to offer win-win (and sometimes another ‘win’ in the case of sandwich options) to vendors who have little or are in negative equity;
- Genuine solutions are provided where all parties can eventually gain – the ‘unethical’ aspect of buying BMV is removed by the fact that vendors are getting the price that they want and often more (with costs covered);
- As the credit crunch took its effects, many investors found it difficult to obtain mortgage finance due to banking institutions stringent lending criteria. Lease options can enable a potential buyer to take control of another parties mortgage whilst the lending market becomes more accessible;
- Income can be still be gained in the form of profits from rental income;
- The buyer has the right but not the obligation to purchase. It may, for example, come to a stage where the buyer may not be sure as to whether to take on full ownership of the asset – in which case a number of profitable options can still be undertaken;
- More activity in the housing market is always to be encouraged and investment decisions can be made on guided principles as opposed to speculation.
*** It is worth noting that, whilst lease options are a very feasible method to profit from residential property, the strategies and concepts are very new and, as such, have not had the chance to stand the test of time. We would, therefore, recommend seeking suitably qualified and commercially aware solicitors to work with, particularly when reviewing contracts (please feel free to contact us on the details below for some recommendations). ***
*** THREE TYPES OF RESIDENTIAL PROPERTY LEASE OPTIONS ***
1) Purchase Lease Option / Short Term Lease Option
The buyer is granted the option to purchase the property at a given date for a given price (usually within a short period, for example to give time for a sale to complete). This is used to ‘lock in’ a purchase price and is accepted by vendors on the basis that they will know what they will be achieving and so that the buyer can proceed comfortably knowing that the sale will occur.
2) Lease Option
The most common form of option used amongst property professionals – the best way to explain a ‘lease option’ is, in short, when a investor takes control of the property without ownership (although the usual objective is to eventually transfer the deeds into your name and reap the rewards of any capital gain). Lease options work very well in a bottoming property market as, firstly, the vendor can remove the ‘ball and chain’ of owning a property that they are desperate to shift (and achieve a price that is reasonable for them) and, secondly, the investor to feel sure that he/she will be able to profit from the deal in the future (as well as receive rental income).
3) Sandwich Lease Option
Originating from Australia and the US where they have been commonly used in residential property for some time, a lease option (as above) is used to control the property with a separate purchase option put in place granted to a tenant buyer. There are essentially two exercise prices: the first, which is set with the owner (at a low value) and the second with the tenant buyer (at a higher value) – the investors profit will be both the ‘filling’ (the price differential) and positive cash flow that is achieved via the rental income from the tenant buyer. Read our interview with commercial lawyer, Richard Spender, on sandwich options by clicking here.
Please click on this link to see a recording of our lease options roundtable discussion.
Note you will have to be a member of the Property Investor Hub to access the video, which can be done in under a minute by clicking here.
Acquiring UK Property Through the Means of Lease Options – An Introduction
The use of options to take control of property has only recently become commonplace strategy in the UK – particularly
after the onset of the credit crunch. A lease option is an abbreviated form of the more formal term referred to as a ‘lease with an
option to purchase’. In short, a lease option enables the buyer to enter a contractual agreement with the owner of an
asset to take its control on the basis of the owner transferring the asset within a specific time frame for a specific price.
Options are used in various forms across a variety of financial transactions including in the stock market (often referred to as ‘futures’).
Contrary to what is often stated, lease options have not been exported into the UK from countries like the USA and Australia but have
existed for centuries – albeit solely within the commercial and land sectors. In land, the lessee (or potential buyer) usually takes an option for
a number of reasons such as to ascertain its open market value; to ensure planning permission can properly obtained (and there are no encumbrances)
and/or to buy time for the land to be leased. In commercial property, lease options allow corporations to evaluate operations on an
ongoing basis prior to locking into long-term contracts (amongst several other uses).
Many see the main downside of lease options being the fact that the buyer does not take ‘ownership’ of the property which, whilst theoretically true,
does not mean that these kinds of transactions should not be taken seriously. Below are some of the benefits of lease options:
- The commonly referred ‘below market value’ or ‘BMV’ strategy of aquiring property requires a certain amount of equity to remain in the
property to facilitate a purchase. Lease options, on the other hand, enable investors to offer win-win (and sometimes another ‘win’ in
the case of sandwich options) to vendors who have little or are in negative equity;
- Genuine solutions are provided where all parties can eventually gain – the ‘unethical’ aspect of buying BMV is removed by the
fact that vendors are getting the price that they want and often more (with costs covered);
- As the credit crunch took its effects, many investors found it difficult to obtain mortgage finance due to banking institutions stringent lending criteria. Lease
options can enable a potential buyer to take control of another parties mortgage whilst the lending market becomes more accessible;
- Income can be still be gained in the form of profits from rental income;
- The buyer has the right but not the obligation to purchase. It may, for example, come to a stage where the buyer may not be sure
as to whether to take on full ownership of the asset – in which case a number of profitable options can still be undertaken;
- More activity in the housing market is always to be encouraged and investment decisions can be made on guided principles as opposed
to speculation.
*** It is worth noting that, whilst lease options are a very feasible method to profit from residential property, the strategies and concepts are
very new and, as such, have not had the chance to stand the test of time. We would, therefore, recommend seeking suitably qualified and commercially
aware solicitors to work with, particularly when reviewing contracts (please feel free to contact us on the details below for some
recommendations). ***
*** THREE TYPES OF RESIDENTIAL PROPERTY LEASE OPTIONS ***
1) Purchase Lease Option / Short Term Lease Option
The buyer is granted the option to purchase the property at a given date for a given price (usually within a short period,
for example to give time for a sale to complete). This is used to ‘lock in’ a purchase price and is accepted by vendors on
the basis that they will know what they will be achieving and so that the buyer can proceed comfortably knowing that the sale will occur.
2) Lease Option
The most common form of option used amongst property professionals – the best way to explain a ‘lease option’ is, in short, when a investor
takes control of the property without ownership (although the usual objective is to eventually transfer the deeds into your name and
reap the rewards of any capital gain). Lease options work very well in a bottoming property market as, firstly, the vendor can remove
the ‘ball and chain’ of owning a property that they are desperate to shift (and achieve a price that is reasonable for them) and, secondly,
the investor to feel sure that he/she will be able to profit from the deal in the future (as well as receive rental income).
3) Sandwich Lease Option
Originating from Australia and the US where they have been commonly used in residential property for some time, a lease
option (as above) is used to control the property with a separate purchase option put in place granted to a tenant buyer.
There are essentially two exercise prices: the first, which is set with the owner (at a low value) and the second with the
tenant buyer (at a higher value) – the investors profit will be both the ‘filling’ (the price differential) and positive
cash flow that is achieved via the rental income from the tenant buyer.
Please click on the following link to see a recording of our lease options roundtable discussion:
Note you will have to be a member of the Property Investor Hub to access the video (which will also enable you get FREE news, guides, factsheets,
hint, tips and landlord tools).
http://www.propertyinvestorhub.co.uk
Contact us: info@propertysolvers.co.uk
