Archive for the ‘Lease Options’ Category

Property Lease Options – A Dying Investment Strategy?

January 20th, 2011
No Comments

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.
Share and Enjoy:
  • Digg
  • del.icio.us
  • Facebook
  • Google Bookmarks
  • email
  • LinkedIn
  • Live
  • MSN Reporter
  • PDF
  • RSS
  • Twitter
  • Yahoo! Bookmarks
  • Yahoo! Buzz
  • Reddit
  • StumbleUpon

Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,
Posted in Lease Options | No Comments »

Lisa Orme – A Truly Experienced Property Expert – Speaks with PS Investor Services

December 2nd, 2010
No Comments

Please see below an interview with Lisa Orme from Keys UK Limited – a genuinely experienced investor that is often referred to as the ‘expert’s expert’.  We discuss her history as a professional property investor; the risks of a bottoming market; whether property today is only for the cash rich; newbie investing / entering the market with low cash reserves; no money down in 2011; tips obtaining mortgage finance in a challenging market; improving your credit rating for the buy to let lenders; the FSA’s ‘Mortgage Market Review’; property options / impending regulation; the base rate rise and some advice for highly geared landlords.

1) For those that do not know, can you give our readers a bit of background about yourself? I’m Lisa Orme but you may also see me referred to as Lisa Williams. I can assure you I’m one in the same person! Orme was my maiden name and Williams is my married name. Most people in property circles know me as Orme so I tend to stick to that.  My husband, Stuart and I, started Keys UK Limited almost ten years ago.  We read ‘Rich Dad, Poor Dad’ by Robert Kiyosaki and that was our epiphany moment.  Wanting to ‘get into property’ we started the letting agency working from home in addition to both having full time jobs but quickly realised it was the landlords who were making the money.  So we sold an endowment policy that would never give us the promised returns and used the £40k it gave us to buy a property to refurb. We sold it and made a £40k profit – a 100% return on our investment. We got the property bug and spent the next 8 years or so investing in and developing property in the Midlands.  When the credit crunch hit and things went quiet we started our own mortgage brokerage. A lot of people thought I was completely mad but it’s a brilliant addition to our business strategy and I had no idea how much I would love it.

2) It has become increasingly apparent that the property market is close to the bottom which many people are seeing as an excellent opportunity – but what do you perceive are the main risks? I actually think its got a way to go yet. We still have the fact that the banks have to repay all of their loans, the VAT increase and massive cuts in the public sector which will knock onto the private sector (especially in the construction industry) and affect confidence which will further affect jobs and incomes and ultimately mean people losing their homes thus creating further falls in the market.  That doesn’t mean its not a good time to buy however; prices are low and if you’re either in and out for quick profit or in it for the long haul you can’t go wrong if you buy sensibly.

2) Do you the property investment market today is only for the cash rich? There’s no doubt that cash is king but not in terms of being able to move quickly on deals but in terms of the levels of deposits being demanded by lenders. But that’s not to say that there aren’t ways to buy property without you having the cash yourself and I’m not talking about so called ‘no money down’ schemes.  If you have cash rich joint venture partners then this is a great way to be able to profit from someone else’s cash if they can profit from your knowledge and experience. Partnering together on mortgages is perfectly legitimate way to work together. Buying cash then remortgaging or topping up the difference on bridging then selling or remortgaging are also good and totally legitimate strategies.

3) For newbies – do you think it’s advisable to enter as a property investor without savings or some kind of cash back up fund? Absolutely not.  Even if you fall for a no money down scheme property is still a very cash intensive business. If you have a couple of months void period, a boiler breakdown or what happened to me with one of my first tenants trashing the property leaving £10,000 worth of damage and £6,000 of rent arrears then you’re going to be in trouble!  You should ensure you have several thousand pounds of cash available for these eventualities at the very least. And the more properties the bigger the reserve should be.

4) Should a new investor wish to enter the market with a small amount of cash reserves – what would be your best advice? Ensure you have a back up supply of cash whether that be a JV partner or relative, a credit card or an overdraft. Not that I’d recommend getting into debt other than the mortgage for a property but to go into property with no reserve at all is just crazy.

5) What are your thoughts on no money down in the current market (for example using a secured loan to bridge the deposit and very other strategies being used)? As long as there is full disclosure to the lender of your ACTUAL purchase price then I don’t have problem with it. The problem is none of the schemes I have seen do this and all involve non-disclosure which is potentially mortgage fraud and is being committed by the applicant.  There are lenders that may consider more creative deal structures using borrowed money for deposits, vendor gifts or alternative assets/security being used as the deposit but none of these will be the main buy to let lenders. These will be commercial type lenders that will want to know every aspect of the deal before agreeing to it and probably charge significantly higher rates and fees as a result.

6) As an experienced mortgage finance specialist, do you think the main buy to let lenders will continue to accept these kinds of applications (knowing that investors are leveraging themselves)? Lenders DON’T accept these type of applications at all. They are submitted subversively. Lenders are duped into believing the client is paying x for a property when they are in fact paying y. If the lender was informed (as per their terms and conditions) of the ACTUAL purchase price then they will most likely refuse the case completely but at best only lend based on the ACTUAL purchase price.

7) In terms of obtaining mortgage finance, what would be your suggestions for an investor to improve their positions in the eyes of the buy to let lenders? A good credit score is only half the story and I’m fully aware of people with over 900 on their credit files failing and those with much lower scores passing.  Lenders will be looking at your score and your credit profile combined as well as a number of other factors. Any one of these alone may not have that dramatic an impact but combine two or more and you could find yourself being rejected by lenders:-

  • Ensure you are on the electoral roll;
  • Avoid moving house frequently – the ideal is one address covering the last 3 years;
  • Keep your current bank account clean; by this I mean avoid late charges, going over overdraft limits, ensure you have plenty of credits and debits on a regular basis and that they all get paid;
  • Ensure you have at least one utility bill in your name – there’s a tendency for one adult to take responsibility for all bills in many households but this can work against you so put them in joint names or split them between you;
  • Watch those credit cards and loans – even if you have never missed a payment lots of unsecured debts will adversely affect your applications;
  • Similarly if you have lots of credit cards and aren’t using them cancel a few – lots of available unsecured debt can have the same detrimental affect;
  • NEVER miss a mortgage payment – unless you have a very good reason for this and the evidence to back it up this will certainly result in a declined application;
  • Avoid missing credit card and loan payments – the odd one over several years is unlikely to have that bad an effect but lots of them or a regular habit of missed payments will mean no.

It’s not true that those with large portfolios can’t borrow as many of my clients could testify and given we are extremely busy with everyone from brand new investors through to investors with multimillion pound portfolios I know lenders are still lending and clients are still borrowing!

8)Can investors and landlords expect to feel the effects of the FSA ‘Mortgage Market Review’? The Mortgage Market Review is primarily concerned with residential mortgages but we are seeing lenders be overly cautions for example self cert was only mooted as being targeted by the FSA but in order to pre-empt the FSA hatchet the lenders just withdrew from self cert and there is now no self cert residential mortgages available at all!  There are rumours about banning interest only mortgages and there are many buy to let investors rightly concerned about this but again it is very unlikely to apply to buy to let and more likely we will only see changes in residential lending and already have.  The impact is therefore that lenders pull the plug prematurely and withdraw from problem areas or areas that they see as requiring more effort. Buy to let is certainly one of those areas which is why we are left with so few lenders. And those that are left tightening criteria and reducing lending levels.  But there are some new players too and likely to be more in the coming few years so all is not lost for buy to let; on the contrary I think the future holds great promise.

9) You are very well known for your understanding of property options – what would be your advice to people looking into this strategy for the short to medium term future? Short would be the operative word for me. We will now only do option deal where there is a very defined and relatively short term exit ideally under 12 months.  A perfect example might be a redemption penalty situation; the clients can sell for say £120k which suits you if it were not for a redemption penalty that adds an additional £6,000 to the debt and finishes the deal for you both. This is a perfect example of where I would use an option to seal the deal, let out the property and then complete on the purchase when the redemption penalty expires.  The clients have moved on, there’s a clear and defined exit and they will be motivated to complete on the deal.

Too many lease option deals are being done where debts are involved and often the sellers get sellers remorse once you have taken away the immediate pain. I am aware of many investors who have lost a lot of money on options that they will never get to complete on because the owner has refused to exercise the option. Taking these to court is a waste of time and money.

10) With the increased media attention options have receiving this year – can we expect to see regulation come into play (as with sell and rent back a few years ago)? This is extremely likely and the FSA already have their eye on these.  It’s not going to happen just yet as with sale and rent back it will be when a number of cases are highlighted in the press or to organisations such as Shelter. This is not likely to come about until we see a wave of repossessions when interest rates rise or when house prices go up.  In the former case investors who have taken on properties due to a low rate on the underlying mortgage will find their cashflow stretched and will walk away (as the option legally though not morally allows them to do) leaving the ‘seller’ in the lurch and probably not realising that this could happen.

In the case of house prices most investors are only going to want to exercise the option when house prices have gone up sufficiently to make it worth their while. At this point seller remorse kicks in and the seller realises how much equity they’re giving up. A quick call to citizen’s advice or their solicitor to check on the validity of these agreements or going to ground will prevent many investors being able to exercise their options.

The real concern comes where there are also tenant buyers who may have paid deposits that investors have spent and/or paid higher rents expecting those to be credited towards their home.  I’ve already seen several examples of investors heading towards bankruptcy and tenant buyers being unaware that their money is lost and option worthless.  It is when all this starts to unravel we will see regulatory changes; all too late of course but the fallout has the potential to be huge and to damage the industry further.

11) What is your advice to people who maybe on tracker / variable rates and are concerned about the eventual base rate rise? Assume rates are going to rise! It would be unwise to get comfortable on the current low rates.  Preparation is key; it’s no good when rates rise saying ‘I never saw that coming’!  If that means selling some or even all of your properties then do it! If it also means not buying any more and consolidating them so be it.

12) And – for the highly geared landlord concerned about the slow recovery of house prices – would you be able to provide some potential risk mitigation strategies? There are a number of things landlords can do but they all involve assessing the situation and getting real with yourself – there’s no quick fix once you have decided to bury your head in the sand. Some suggestions include:

  • Getting a job!
  • Expanding your services – manage property deals or refurbishments for other investors;
  • Curb your spending (personal and property) – if that means getting rid of the sports car or downsizing your home so be it;
  • Budget and monitor your expenses like a hawk;
  • Improve cashflow – can you increase your rents? Can you offer added incentives or a new fixed term tenancy? Can you let to LHA tenants (although be careful of the changes next year)?;
  • Manage your properties yourself to reduce management and letting fees;
  • Convert single lets to Houses of Multiple Occupation (HMOs);
  • Remortgage – whilst many people are on low base rate trackers, I’m constantly surprised by how many aren’t. Speak to your mortgage adviser about the current products on offer – you may surprised at how low some of the rates actually are and with LTVs up to 80%, things aren’t as bad as many make out;
  • Refinance – it may be better to pull out some cash as a reserve for tougher times now than not be able to later.  Don’t spend it of course but placed in a decent savings account, it may help you out if times get tough;
  • Insure against rate rises – it’s possible to take out an insurance policy to hedge against rate rises. You simply determine when you want the insurance to kick in and they’ll cover the payments over and above that point. Its nowhere near as expensive as investors believe it to be, for example: to cover £1,000,000 worth of interest only mortgages 2% beyond where they currently are (e.g. current rate 2.5% so insurance will pay anything over 4.5%) will cost just £262 a month;
  • Finally do talk to your lender even if you haven’t missed any payments yet. They don’t want to repossess, especially not in the current market. If they can help they will, and will help you do a portfolio review, determine a strategy going forward and a ‘what if’ should the worst happen.

For mortgage advice and information contact Lisa at lisa@keys-mortgages.com or call 024 7617 0096; please mention PSI.

You can also get updates on new products and services, financing tips and advice at www.twitter.com/keysmortgages and property investor updates and tips at www.twitter.com/lisaorme

The above is for information purposes only; rates can change and may not be applicable at the time of publication. Please consult appropriate professionals and contact us for up to date quotations. Keys (UK) Limited is an Appointed Representative of Julian Harris Mortgages Ltd. Authorised and regulated by the Financial Services Authority in the conduct of mortgage and general insurance business with FSA No. 304155. Your home may be repossessed if you do not keep up repayments on a mortgage or other loan secured on it. Think carefully before securing other debts against your home. Buy to let (pure) and commercial mortgages are not regulated by the FSA.

For full details of our terms, fees and disclosures please go to the Keys Mortgages website at www.keys-mortgages.com

Share and Enjoy:
  • Digg
  • del.icio.us
  • Facebook
  • Google Bookmarks
  • email
  • LinkedIn
  • Live
  • MSN Reporter
  • PDF
  • RSS
  • Twitter
  • Yahoo! Bookmarks
  • Yahoo! Buzz
  • Reddit
  • StumbleUpon

Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,
Posted in Business Management, Finance, Lease Options, Tips for Property Investing | No Comments »

Kevin Green (Secret Millionaire) Video Interview

September 29th, 2010
No Comments

Please see below a video interview with Kevin Green (split into two parts) – debatably one of the UK’s most well known property experts not only due to his appearance in Channel 4’s Secret Millionaire show but also his well-known wealth training programmes and honest, up-front approach to investment. Edward Lane caught up with Kevin and discussed the importance of public promotion as a property investor; the current housing market; his thoughts on the future; consumer affordability levels; his advice for newbies / the risk averse; his own investment strategies; lease options and the recent controversy surrounding their use; buying repossessed property (creating a win-win house sale) as well as his wealth training programme:

As stated in the interview, please head to Kevin Green’s website for more information about his wealth training programmes and various other useful links.

Share and Enjoy:
  • Digg
  • del.icio.us
  • Facebook
  • Google Bookmarks
  • email
  • LinkedIn
  • Live
  • MSN Reporter
  • PDF
  • RSS
  • Twitter
  • Yahoo! Bookmarks
  • Yahoo! Buzz
  • Reddit
  • StumbleUpon

Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,
Posted in Business Management, Lease Options, Tips for Property Investing | No Comments »

Using Lease Options to Acquire Residential Property

March 15th, 2010
No Comments

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
Share and Enjoy:
  • Digg
  • del.icio.us
  • Facebook
  • Google Bookmarks
  • email
  • LinkedIn
  • Live
  • MSN Reporter
  • PDF
  • RSS
  • Twitter
  • Yahoo! Bookmarks
  • Yahoo! Buzz
  • Reddit
  • StumbleUpon

Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,
Posted in Lease Options | No Comments »

The Truth About Sandwich Lease Options

January 27th, 2010
1 Comment

The use of sandwich lease options has become an increasingly popular strategy for investors who are looking to not only help home owners sell quick, but also assist those who want to get on the ladder (and thereby enabling the investor to make a decent profit in terms of rental income and future capital gains – the so called ‘win-win-win’).  Yet, it has also left many scratching their heads with regards to the best way to conduct the transaction as well as the future legal implications for all parties involved. Please see below an interview with Richard Spencer, a commercial lawyer and one of the UK’s thought leaders on effectively making the use of lease options in their various forms:

“I am a partner in the Commercial Property team at BPE Solicitors LLP (BPE).  BPE is a commercial law firm based in Cheltenham, Gloucestershire and acts for a range of clients including property investors,  developers, PLCs and entrepreneurs.
I have advised property developers in the use of option agreements for 6 years.  I started to offer options to property investors around 18 months ago, as conventional mortgages became more difficult to obtain.”
2)  Sandwich Lease Options have been very popular in the US and Australia but have only, perhaps in the last few years, become increasingly popular in the UK.  What are the fundamental legal aspects that people need to be aware of?
Sandwich options involve the use of two option agreements.  The vendor grants the first option to the investor.  A second option is granted to a tenant buyer, who occupies the property under an assured shorthold tenancy agreement.  Many investors have been lead to believe that sandwich options are the holy grail.  Personally, I would avoid them.  They are complex and difficult to put together, the risks for the tenant buyer are high and there is a much higher chance that the investor’s back-end profit will never materialise.  However, some deals may require a sandwich to make the figures stack up.  The only way I can think they can possibly work is to ensure that the legal owner grants both options, so that the tenant buyer can later show its lender that the seller has owned the property for over six months and that payments have been made towards the full purchase price and not towards an investor’s profit.  The fact that the seller then has to account to the investor for the difference between the two prices, should not (in theory!) affect the tenant buyer’s disclosure to its lender.
By granting an option to a tenant buyer the investor is limiting the price he can later sell for.  Why not just take a purchase option and rent out the property?  At least that way, the investor can retain any capital appreciation for himself.
3)  What are the essential documents that need to be in place?
An investor taking an option needs the following:
- option agreement
- irrevocable power of attorney for each vendor (although if there is more than one vendor, there needs to be more than one attorney)
- form RX1 signed by the vendor
An investor may also ask the vendor to sign a Transfer Deed (TR1) in case the vendor later disappears.
An investor granting an option to a tenant buyer just needs an option agreement and AST.
The use of an irrevocable power of attorney does not guarantee that the investor will be able to sign documents in the name of the vendor.  The vendor may later suggest that he was under duress to sign and a court may quash the power.  However, it’s worth having one signed as back-up.  The best way to complete a sale is to have the vendor sign the Transfer Deed in the traditional way.
Also having a Transfer Deed signed now does not guarantee that this will be capable of registration at the Land Registry.  The Land Registry changes the look of the form now and again and if the form changes, an old version will not be registered.  Also, on registration the investor’s solicitor needs to show on form AP1 which solicitors acted for the vendor on completion.  If no firm acts, the vendor must complete and sign form ID1 and provide a passport style photograph.  This form needs to be partially completed by a solicitor who has checked the vendor’s ID and certified the photo to confirm it is a true likeness of the vendor.  Form ID1 was introduced to combat property fraud.  The simplest solution is for the option agreement to confirm that the investor will pay the seller’s legal fees on completion and also to leave a ‘carrot’ for the seller on completion, to motivate him to instruct a solicitor and complete the sale.  Some investors offer a small percentage of any equity or a percentage of the proceeds in excess of a certain sale price.  All of this needs to be set out in the option agreement.
4)  How can investors ensure that their position is protected when undertaken a sandwich lease options?  Are there certain clauses in the contracts that need to be in place in order to be legally binding?
- The main risks lie with the tenant buyer.  The investor should ensure he registers an agreed or unilateral notice to protect his option and also a Restriction to stop any further dealings with the property.  The tenant buyer will also want to register a notice to protect his option.
5)  Are there any circumstances where you would not recommend an investor going ahead with a sandwich option agreement?
- Many commentators advise investors to avoid any option deal whether the seller already has severe financial difficulties.  Also, it is common sense but investors should carry out all of the usual checks on a tenant buyer as they would a normal tenant.
6)  Do you have a set option period that you recommend to your clients – or does it depend on the deal?
- The length of the option depends on the deal.  The option period needs to be long enough to allow for the value to increase enough to make a good profit, unless the investor is only interested in cashflow.  The period also needs to be long enough to avoid paying any early redemption penalties.  An option merely gives certain control over a property.  An option is not as good as legal ownership, so an investor should aim to complete the purchase as soon as possible.  Whilst the option is in place, plenty can change and cause the deal to fall over.
7) As an investor, can you assign a sandwich option on to another party?
- An option can be assigned to a third party, so long as the contract expressly permits this.  An investor will need a Deed of Assignment to assign the option.  Following an assignment, the investor must also give written notice of the assignment to the vendor to ensure that it is effective in law.
8) Do the courts view a tenant buyer differently to any other tenant (should any issues arise – ie, because of the fact they have an interest in the property)?
- The tenant buyer is a normal tenant under an AST.  The option is merely a bonus but, so long as it is set up correctly, the option gives the tenant buyer an interest in the land.  The option should clearly state that it may be terminated by the vendor if the tenant breaches the AST or if the AST is lawfully ended.  If the option does not allow this, the AST may end but the tenant buyer may continue to have an option to purchase!  For this to happen, he would also need to continue to make the monthly option payments.
9) With regards to option credits (ie. rental supplements which will go towards the tenant buyers purchase price) – how should this be managed to keep everything safe for all parties?
- The safest method for tenant buyers is to ensure that all monthly option payments (as opposed to rent) are held by the investor in a separate bank account and on trust for the tenant buyer.  This will need to be documented either in the option agreement or in a separate deed.  This method is similar to commercial property landlords who hold rent deposits.  As the funds are held on trust, they should not form part of his estate on death or insolvency.  However, if the investor goes bust the tenant buyer may need to bring the trust to the attention of the official receiver or trustee in bankruptcy before he takes the money.
- Some options also allow further credits or allowances towards the purchase price.  For example, in one option I worked on the investor allowed the tenant buyer a further 70% of the option fees paid, so long as the payments were made on time (up to an agreed maximum).  So if the tenant buyer paid £100, the investor allowed a further credit of £70 towards the price.  Some caution needs to be exercised here, as lenders may not allow credits to be made in this way, just as the don’t always allow gifted deposits or incentives made by developers.  The option should deal with this scenario and allow the tenant buyer the discretion to choose between an allowance or a price reduction.
10)  Would you recommend investors taking on a tenant buyer that has been repossessed or made bankrupt in the past?
- Investors will be better placed than I am to choose tenant buyers.  Some multi-millionaires were once bankrupt.  The checks needs to show whether the tenant’s income is sufficient to make the payments under the option and the AST.  If there are going to be problems, they usually start early in the option period, so investors should grant six month ASTs.
11)  How can investors get hold of you Richard?
I can be contacted on 01242 248232 or by email at richard.spencer@bpe.co.uk.

1)  Can you start by giving us a bit of information about your firm and how long you have been dealing with lease options? I am a partner in the Commercial Property team at BPE Solicitors LLP (BPE).  BPE is a commercial law firm based in Cheltenham, Gloucestershire and acts for a range of clients including property investors,  developers, PLCs and entrepreneurs.  I have advised a range of  property developers in the use of option agreements for 6 years.  I started to offer options to property investors around 18 months ago, as conventional mortgages became more difficult to obtain.

2)  Sandwich Lease Options have been very popular in the US and Australia but have only, perhaps in the last few years, become increasingly popular in the UK.  What are the fundamental legal aspects that people need to be aware of? Sandwich options involve the use of two option agreements.  The vendor grants the first option to the investor.  A second option is granted to a tenant buyer, who occupies the property under an assured shorthold tenancy agreement.  Many investors have been lead to believe that sandwich options are the holy grail.  Personally, I would avoid them.  They are complex and difficult to put together, the risks for the tenant buyer are high and there is a much higher chance that the investor’s back-end profit will never materialise.  However, some deals may require a sandwich to make the figures stack up. The only way I can think they can possibly work is to ensure that the legal owner grants both options, so that the tenant buyer can later show its lender that the seller has owned the property for over six months and that payments have been made towards the full purchase price and not towards an investor’s profit.  The fact that the seller then has to account to the investor for the difference between the two prices, should not (in theory!) affect the tenant buyer’s disclosure to its lender.  By granting an option to a tenant buyer the investor is limiting the price he can later sell for.  Why not just take a purchase option and rent out the property?  At least that way, the investor can retain any capital appreciation for himself.

3)  What are the essential documents that need to be in place?  An investor taking an option needs the following:

  • an option agreement;
  • an irrevocable power of attorney for each vendor (although if there is more than one vendor, there needs to be more than one attorney)
  • a form RX1 signed by the vendor

An investor may also ask the vendor to sign a Transfer Deed (TR1) in case the vendor later disappears.  An investor granting an option to a tenant buyer just needs an option agreement and AST.  The use of an irrevocable power of attorney does not guarantee that the investor will be able to sign documents in the name of the vendor.  The vendor may later suggest that he was under duress to sign and a court may quash the power. However, it’s worth having one signed as back-up.  The best way to complete a sale is to have the vendor sign the Transfer Deed in the traditional way.

Also having a Transfer Deed signed now does not guarantee that this will be capable of registration at the Land Registry.  The Land Registry changes the look of the form now and again and if the form changes, an old version will not be registered.  Also, on registration the investor’s solicitor needs to show on form AP1 which solicitors acted for the vendor on completion.  If no firm acts, the vendor must complete and sign form ID1 and provide a passport style photograph.  This form needs to be partially completed by a solicitor who has checked the vendor’s ID and certified the photo to confirm it is a true likeness of the vendor.  Form ID1 was introduced to combat property fraud.  The simplest solution is for the option agreement to confirm that the investor will pay the seller’s legal fees on completion and also to leave a ‘carrot’ for the seller on completion, to motivate him to instruct a solicitor and complete the sale.  Some investors offer a small percentage of any equity or a percentage of the proceeds in excess of a certain sale price.  All of this needs to be set out in the option agreement.

4)  How can investors ensure that their position is protected when undertaking a sandwich lease options?  Are there certain clauses in the contracts that need to be in place in order to be legally binding? The main risks lie with the tenant buyer.  The investor should ensure he registers an agreed or unilateral notice to protect his option and also a restriction to stop any further dealings with the property.  The tenant buyer will also want to register a notice to protect his option.

5)  Are there any circumstances where you would not recommend an investor going ahead with a sandwich option agreement? Many commentators advise investors to avoid any option deal whether the seller already has severe financial difficulties.  Also, it is common sense but investors should carry out all of the usual checks on a tenant buyer as they would a normal tenant.

6)  Do you have a set option period that you recommend to your clients – or does it depend on the deal?  The length of the option depends on the deal.  The option period needs to be long enough to allow for the value to increase enough to make a good profit, unless the investor is only interested in cashflow.  The period also needs to be long enough to avoid paying any early redemption penalties.  An option merely gives certain control over a property.  An option is not as good as legal ownership, so an investor should aim to complete the purchase as soon as possible.  Whilst the option is in place, plenty can change and cause the deal to fall over.

7) As an investor, can you assign a sandwich option on to another party? An option can be assigned to a third party, so long as the contract expressly permits this. An investor will need a Deed of Assignment to assign the option.  Following an assignment, the investor must also give written notice of the assignment to the vendor to ensure that it is effective in law.

8)Do the courts view a tenant buyer differently to any other tenant (should any issues arise – ie, because of the fact they have an interest in the property)?  The tenant buyer is a normal tenant under an AST.  The option is merely a bonus but, so long as it is set up correctly, the option gives the tenant buyer an interest in the land.  The option should clearly state that it may be terminated by the vendor if the tenant breaches the AST or if the AST is lawfully ended.  If the option does not allow this, the AST may end but the tenant buyer may continue to have an option to purchase! For this to happen, he would also need to continue to make the monthly option payments.

9) With regards to option credits (ie. rental supplements which will go towards the tenant buyers purchase price) – how should this be managed to keep everything safe for all parties? The safest method for tenant buyers is to ensure that all monthly option payments (as opposed to rent) are held by the investor in a separate bank account and on trust for the tenant buyer.  This will need to be documented either in the option agreement or in a separate deed.  This method is similar to commercial property landlords who hold rent deposits.  As the funds are held on trust, they should not form part of his estate on death or insolvency.  However, if the investor goes bust the tenant buyer may need to bring the trust to the attention of the official receiver or trustee in bankruptcy before he takes the money.

Some options also allow further credits or allowances towards the purchase price.  For example, in one option I worked on, the investor allowed the tenant buyer a further 70% of the option fees paid, so long as the payments were made on time (up to an agreed maximum).  So if the tenant buyer paid £100, the investor allowed a further credit of £70 towards the price.  Some caution needs to be exercised here, as lenders may not allow credits to be made in this way, just as the don’t always allow gifted deposits or incentives made by developers.  The option should deal with this scenario and allow the tenant buyer the discretion to choose between an allowance or a price reduction.

10)  Would you recommend investors taking on a tenant buyer that has been repossessed or made bankrupt in the past?  Investors will be better placed than I am to choose tenant buyers.  Some multi-millionaires were once bankrupt.  The checks needs to show whether the tenant’s income is sufficient to make the payments under the option and the AST.  If there are going to be problems, they usually start early in the option period, so investors should grant six month ASTs.

11)  How can investors get hold of you Richard?  I can be contacted on 01242 248232 or by email at richard.spencer@bpe.co.uk. Our website can be found by clicking here: BPE Solicitors LLP.

Share and Enjoy:
  • Digg
  • del.icio.us
  • Facebook
  • Google Bookmarks
  • email
  • LinkedIn
  • Live
  • MSN Reporter
  • PDF
  • RSS
  • Twitter
  • Yahoo! Bookmarks
  • Yahoo! Buzz
  • Reddit
  • StumbleUpon

Tags: , , , , , , , , , , , , , , ,
Posted in Due Diligence, Lease Options, Tips for Property Investing | 1 Comment »

Taxation When Doing Lease Options Deals

January 27th, 2010
No Comments
1) What are the major taxes that investors should be concerned with when dealing with lease option transactions?
Well the largest of them is the possible liability of Inheritance Tax (IHT) and Capital Gains Tax (CGT).  Investors will also need to declare any income tax they are in receipt of in much the same way as with any other buy to let property.  Note you will be able to offset this latter tax against certain business expenses.
2) How do they apply to lease options?
When it comes to the option enforcement point investors should be aware that both CGT and IHT will apply – so even if you are planning to flip the lease option, be sure to account for the tax liability.  As many readers would know, however, investors have set allowance of £325,000 for IHT and £10,100 CGT (note that these have been changing year in year out recently).  If you are doing lease options, then ensure you are doing it in the correct way to mitigate any potential tax liability.
3) Can taxes be offset in any way?
As mentioned above, income tax can be offset.  Having spoken to the Inland Revenue about this issue, my understanding is that CGT and IHT taxes cannot be offset in any way due to the complexity of undertaking lease option agreements.
4) Are there any tax benefits in undertaking lease options?
No significant tax benefits, though each case should be viewed on merit before giving any specific advice, as with all of these cases, there is unfortunately no generic answer.  Drop me a line and I will be able to outline the current, medium term and long term implications on a per deal basis (contact details are below).
5) Should the Inland Revenue be informed prior to do any kind of lease option transaction?
No, there is no necessity of doing this
6) Should investors file their tax returns in the same way?
Yes, everything is done in the same way as they would on their standard tax return.
7) Should the optioner (grantor) be aware of any tax implications?
No, none that can be noted at present (subject to change by the HMRC).
8) If, for example, if the option is exercised after the 5 year PPR period granted to homeowners – would they be subject to CGT (if they have not lived in the property)?
Yes, there would be the liability to CGT but the usual allowances would kick at the rate defined by the HMRC each year
For any lease option transaction, it is highly advisable to seek professional advise via a tax specialist or an accountant with the relevant knowledge on the subject.  The answers above could be subject to changes, so we would also recommend investors be vigilant when doing business.  For independent and objective advice, Simon can be contacted via email at thetaxinsider@yahoo.com orWith With

With many property investors incorporating lease options into their buying strategy, PS Investor Services have interviewed tax expert and IFA, Simon Goody, on the necessary implications when conducting these kinds of transactions.  Please see the short interview below:

1) What are the major taxes that investors should be concerned with when dealing with lease option transactions?  Well, the largest of them are the possible liabilities of Inheritance Tax (IHT) and Capital Gains Tax (CGT).  Investors will also need to declare any income tax they are in receipt of in much the same way as with any other buy to let property.  Note you will be able to offset this latter tax against certain business expenses.

2) How do they apply to lease options?  When it comes to the option enforcement point investors should be aware that both CGT and IHT will apply – so even if you are planning to flip the lease option, be sure to account for the tax liability.  As many readers would know, however, investors have set allowances of £325,000 for IHT and £10,100 CGT (note that these have been changing year in year out recently and should be monitored).  If you are doing lease options, then ensure you are doing it in the correct way to mitigate any potential tax liability.

3) Can taxes be offset in any way? As mentioned above, income tax can be offset. Having spoken to the Inland Revenue about this issue, my understanding is that CGT and IHT taxes cannot be offset in any way due to the complexity of undertaking lease option agreements.

4) Are there any tax benefits in undertaking lease options? No significant tax benefits, though each case should be viewed on merit before giving any specific advice – as with all of these cases, there is unfortunately no generic answer.  Drop me a line and I will be able to outline the current, medium term and long term implications on a per deal basis (contact details are below).

5) Should the Inland Revenue be informed prior to do any kind of lease option transaction? No, there is no necessity of doing this.

6) Should investors file their tax returns in the same way? Yes, everything is done in the same way as they would on their standard tax return.

7) Should the optioner (grantor) be aware of any tax implications?  No, none that can be noted at present (subject to change by the HMRC).

8)If, for example, if the option is exercised after the 5 year PPR period granted to homeowners – would they be subject to CGT (if they have not lived in the property)? Yes, there would be the liability to CGT but the usual allowances would kick at the rate defined by the HMRC each year

For any lease option transaction, it is highly advisable to seek professional advise via a tax specialist or an accountant with the relevant knowledge on the subject.  The answers above could be subject to changes, so we would also recommend investors be vigilant when doing business.  For independent and objective advice, Simon can be contacted via email at thetaxinsider@yahoo.com or calling 07957-189145 / 0845-226-0728.  Please also see his websites: My Money Mentor and Advice Matters.

Share and Enjoy:
  • Digg
  • del.icio.us
  • Facebook
  • Google Bookmarks
  • email
  • LinkedIn
  • Live
  • MSN Reporter
  • PDF
  • RSS
  • Twitter
  • Yahoo! Bookmarks
  • Yahoo! Buzz
  • Reddit
  • StumbleUpon

Tags: , , , , , , , , , , ,
Posted in Business Management, Lease Options, Property Taxation | No Comments »