Emerald Property Solutions

Property investment company helping investors maximise their return on investment through different purchasing strategies.

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Ok so there’s a lot of talk about how to invest in property from just £1…let us explain.

If you are paying the mortgage on a property, responsible for the maintenance and bills on that property, can rent it out and benefit from the profits, and also sell it in the future and profit from the sale, would you say that person owns the property?

You’d most likely say yes. The answer is actually no. You don’t own the property, but you do control the property…

If you’ve never heard of a Lease Option, don’t worry, most people are the same!

The reason very few people have heard of Lease Options is because of the following:

1) Lease Options have only been around in the UK in recent years. In countries like the USA and Australia they have been around since the 1970′s.

2) Investors who know all about Lease Options tend to like to keep Lease Options for themselves!

A Lease Option allows an option-holder to purchase or sell a property at a fixed price (the exercise price) within a fixed period of time (the option period). Both the exercise price and option period vary from property to property, and are always agreed in advance of any deal being signed.

The purpose of you getting into property is to generate some extra money or become financially free. To do this you buy a house, rent it out, and make a profit.

This is how you would normally buy a house:

£100,000 Purchase Price

£80,000 Mortgage (80% Loan To Value)

£20,000 Deposit (20% Deposit)

£250 Monthly Mortgage (Interest Only)

£50 Bills and Management

£500 Per Month Rental

£200 Per Month Net Profit

In this example you need to invest £20,000 to make £200 per month.

The issue here is that you need £20,000 deposit, and on top of that you need to be able to get a mortgage on the property. If you have a bad credit rating, this might be tricky.

Who Can Do A Lease Option?

Anyone!

The Lease Option agreement is between two parties. The owner of a property (sometimes called the vendor or seller), and an investor (also known as a buyer).

In the UK many residential investors have been using lease options to secure an option to purchase a property and then generating a regular income by renting out the property to private tenants. This gives the investor sufficient income to cover any monthly payments before deciding to exercise their option, or sell it on to a third party (also known as assignment).

The purchaser of the lease option will legally need to pay the seller a small upfront fee for the option, which is usually deducted from the final purchase price. This can be as little as £1 (i.e. ‘Buy A House For £1’) or can be thousands of pounds depending on the price agreed for the underlying investment property.

This option can be then exercised in the future by the option holder or even sold on to a third party at a profit. On top of the upfront fee, the option holder will agree to cover all monthly mortgage costs (usually an interest only mortgage), all maintenance and repairs, management, and bills, essentially taking complete control over the property.

What Is The Risk Of Doing A Lease Option?

As with any investment there is some element of risk. If the tenant you have in the property doesn’t pay, or you have a void period, you would still be responsible for covering all monthly costs, including the sellers mortgage payment-just as you would if you had your own mortgage on the property.

Is There A Risk To The Seller?

The risk to the seller is if the investor, or option holder, doesn’t make the monthly payment on time, thus causing a default on the sellers monthly mortgage payment. The other risks are if the option holder didn’t maintain the property and allows their option to lapse. In reality this is unlikely as the investor will want to ensure the property is in good condition for when they come to exercise their option or sell the property on, as this is the time they will see the real profit.

We recommend both investors and vendors use a specialist Lease Option solicitor when doing a deal of this type.

Why Would Anyone Who Owns A Property Do A Lease Option?

Due to the volatile UK property market, sadly some property owners who purchased properties during a boom period, are now finding themselves in negative equity. Negative equity is where the value of the property is less than the outstanding mortgage. The owner has 2 options-one is of course to stay in the house and keep paying the mortgage, the second is to do a lease option. The upfront payment will help them move house, and agreeing a fixed purchase price for at least their outstanding mortgage guarantees they can sell their house at some point in the future for at least the price they need to sell it for.

Why Would An Investor Do A Lease Option Over Just Buying The Property?

Taking on a Lease Option allows the investors funds to go much further, giving a far greater ROI. If you are purchasing a house outright you would need to save up a lot of deposits!

In the below example you might only need to invest a total of £4-5000 to make the same monthly return as if you had purchased it with a mortgage and deposit…if you had £20,000 you could take on 4 or 5 Lease Options. What would you do?

Lease Option Example…

Owner A has a property worth £80,000.

Their outstanding mortgage is £100,000.

The negative equity on the property is £20,000.

Their monthly mortgage payment is £250.

Other bills are £50.

The Owner has been offered a new job working in a different city and wants to sell their property. They aren’t keen on becoming a landlord, but don’t have sufficient equity to sell the property and clear their mortgage.

The Investor pays The Owner an upfront option fee of £1000 for a 5 year option to purchase the property at £100,000.

The Investor also agrees to pay the monthly mortgage payment of £250, plus any bills associated with the property.

The Investor now has 2 options.

They can either rent the property out for £500 a month, which gives them a net monthly income of £200, and buy the property themselves within 5 years time for £100,000.

Their second option is they can find a Tenant Buyer* who will pay a ‘super rent’ (this will be explained in our Rent To Buy blog), of £600 per month, and agree to purchase the property for £110,000 within 5 years time.

The Tenant Buyer also agrees to an upfront payment of £3,000 which is deducted from the purchase price of £110,000.

So now The Investor is cash flowing £300 per month, he has made £2000 net income upfront (£3000 from the Tenant Buyer – £1000 to The Owner), and will make a further £7000 within 5 years time.

The Owner gets to sell their peoprty for the price they want, The Investor makes a healthy monthly income for upto 5 years, plus generates profit on the sale, and The Tenant Buyer is able to move into a property they will ultimately own in the future, helping them to get onto the property ladder. A win-win-win solution!

*Keep an eye out for our Rent To Buy blog for more information on Tenant Buyers.

Where Do I Find A Lease Option Property?

If you want more information on Lease Options and investing in property, drop us an email on [email protected] to set up a free no obligation chat with one of the Emerald property experts.

[emeraldpropertysolutions-blog]

Buy A House For £1!

Ok so there’s a lot of talk about how to invest in property from just £1…let us explain.

If you are paying the mortgage on a property, responsible for the maintenance and bills on that property, can rent it out and benefit from the profits, and also sell it in the future and profit from the sale, would you say that person owns the property?

You’d most likely say yes. The answer is actually no. You don’t own the property, but you do control the property…

If you’ve never heard of a Lease Option, don’t worry, most people are the same!

The reason very few people have heard of Lease Options is because of the following:

1) Lease Options have only been around in the UK in recent years. In countries like the USA and Australia they have been around since the 1970′s.

2) Investors who know all about Lease Options tend to like to keep Lease Options for themselves!

A Lease Option allows an option-holder to purchase or sell a property at a fixed price (the exercise price) within a fixed period of time (the option period). Both the exercise price and option period vary from property to property, and are always agreed in advance of any deal being signed.

The purpose of you getting into property is to generate some extra money or become financially free. To do this you buy a house, rent it out, and make a profit.

This is how you would normally buy a house:

£100,000 Purchase Price

£80,000 Mortgage (80% Loan To Value)

£20,000 Deposit (20% Deposit)

£250 Monthly Mortgage (Interest Only)

£50 Bills and Management

£500 Per Month Rental

£200 Per Month Net Profit

In this example you need to invest £20,000 to make £200 per month.

The issue here is that you need £20,000 deposit, and on top of that you need to be able to get a mortgage on the property. If you have a bad credit rating, this might be tricky.

Who Can Do A Lease Option?

Anyone!

The Lease Option agreement is between two parties. The owner of a property (sometimes called the vendor or seller), and an investor (also known as a buyer).

In the UK many residential investors have been using lease options to secure an option to purchase a property and then generating a regular income by renting out the property to private tenants. This gives the investor sufficient income to cover any monthly payments before deciding to exercise their option, or sell it on to a third party (also known as assignment).

The purchaser of the lease option will legally need to pay the seller a small upfront fee for the option, which is usually deducted from the final purchase price. This can be as little as £1 (i.e. ‘Buy A House For £1’) or can be thousands of pounds depending on the price agreed for the underlying investment property.

This option can be then exercised in the future by the option holder or even sold on to a third party at a profit. On top of the upfront fee, the option holder will agree to cover all monthly mortgage costs (usually an interest only mortgage), all maintenance and repairs, management, and bills, essentially taking complete control over the property.

What Is The Risk Of Doing A Lease Option?

As with any investment there is some element of risk. If the tenant you have in the property doesn’t pay, or you have a void period, you would still be responsible for covering all monthly costs, including the sellers mortgage payment-just as you would if you had your own mortgage on the property.

Is There A Risk To The Seller?

The risk to the seller is if the investor, or option holder, doesn’t make the monthly payment on time, thus causing a default on the sellers monthly mortgage payment. The other risks are if the option holder didn’t maintain the property and allows their option to lapse. In reality this is unlikely as the investor will want to ensure the property is in good condition for when they come to exercise their option or sell the property on, as this is the time they will see the real profit.

We recommend both investors and vendors use a specialist Lease Option solicitor when doing a deal of this type.

Why Would Anyone Who Owns A Property Do A Lease Option?

Due to the volatile UK property market, sadly some property owners who purchased properties during a boom period, are now finding themselves in negative equity. Negative equity is where the value of the property is less than the outstanding mortgage. The owner has 2 options-one is of course to stay in the house and keep paying the mortgage, the second is to do a lease option. The upfront payment will help them move house, and agreeing a fixed purchase price for at least their outstanding mortgage guarantees they can sell their house at some point in the future for at least the price they need to sell it for.

Why Would An Investor Do A Lease Option Over Just Buying The Property?

Taking on a Lease Option allows the investors funds to go much further, giving a far greater ROI. If you are purchasing a house outright you would need to save up a lot of deposits!

In the below example you might only need to invest a total of £4-5000 to make the same monthly return as if you had purchased it with a mortgage and deposit…if you had £20,000 you could take on 4 or 5 Lease Options. What would you do?

Lease Option Example…

Owner A has a property worth £80,000.

Their outstanding mortgage is £100,000.

The negative equity on the property is £20,000.

Their monthly mortgage payment is £250.

Other bills are £50.

The Owner has been offered a new job working in a different city and wants to sell their property. They aren’t keen on becoming a landlord, but don’t have sufficient equity to sell the property and clear their mortgage.

The Investor pays The Owner an upfront option fee of £1000 for a 5 year option to purchase the property at £100,000.

The Investor also agrees to pay the monthly mortgage payment of £250, plus any bills associated with the property.

The Investor now has 2 options.

They can either rent the property out for £500 a month, which gives them a net monthly income of £200, and buy the property themselves within 5 years time for £100,000.

Their second option is they can find a Tenant Buyer* who will pay a ‘super rent’ (this will be explained in our Rent To Buy blog), of £600 per month, and agree to purchase the property for £110,000 within 5 years time.

The Tenant Buyer also agrees to an upfront payment of £3,000 which is deducted from the purchase price of £110,000.

So now The Investor is cash flowing £300 per month, he has made £2000 net income upfront (£3000 from the Tenant Buyer – £1000 to The Owner), and will make a further £7000 within 5 years time.

The Owner gets to sell their peoprty for the price they want, The Investor makes a healthy monthly income for upto 5 years, plus generates profit on the sale, and The Tenant Buyer is able to move into a property they will ultimately own in the future, helping them to get onto the property ladder. A win-win-win solution!

*Keep an eye out for our Rent To Buy blog for more information on Tenant Buyers.

Where Do I Find A Lease Option Property?

If you want more information on Lease Options and investing in property, drop us an email on [email protected] to set up a free no obligation chat with one of the Emerald property experts.

[emeraldpropertysolutions-blog]

A lot of people have been asking if we have any ‘Off Plan’ investment opportunities, so we thought we should put a blog together about buying off plan investments…

What Happened In 2008…

We should start by reminding investors what happened in 2008…there was a huge financial crisis, and some of the worst hit by this were investors who had invested in ‘Off Plan’ properties due to an inflated value being made when the purchase was made, then when the prices plummeted, investors found themselves with large amounts of negative equity.

Before we go any further, we should probably explain what ‘Off Plan’ investments actually are…

Off Plan Investments

Off Plan is a sale made of a property before it has been built. A buyer or investor is paying to secure the property once it has been built. Usually at a discount to what the final sale price will be once the development has been completed.

The reason developers sell off plan in this way is so they can then use the funds to finance the development itself, essentially underwriting their investment and guaranteeing them a return.

Advantages of Buying Off Plan

Some savvy investors have made a lot of money buying off plan over the years. The way they do this is by buying at an extremely early stage of the development, thus securing a large discount off the final sale price. Some developers then flip the property on to another investor before it is even finished, so they are essentially flipping on their ‘Off Plan’ purchase and making a quick profit. Some investors choose to wait until the property is finished to flip it on, and some choose to keep the property and rent it out, or live in it.

Disadvantages of Buying Off Plan

Although there is money to be made by flipping ‘Off Plan’ investments on to other investors and buyers, that particular market is shrinking all the time, making it more and more difficult to make money by flipping. 

The main disadvantage of buying off plan is the ‘Market Value’, or final development price that the developers come up with, is often a figure plucked out of the air! If there’s nothing to compare it to, they could say ‘the Market Value of this apartment is £100k, but if you buy today you will receive a whopping 40% discount if purchased off plan!’, meaning the investor parts with £60k thinking they are getting a great deal. When the development is finished and the owners who purchased off plan try to sell, they then realise that £100k is extremely optimistic and drop the price…and drop the price again…and again…and again…until they finally get an offer around the £60k mark! Meaning they haven’t actually made anything at all!

What happened in 2008 was exactly this, but the value of the properties dropped well below what the true market value was, forcing investors into huge amounts of negative equity. What’s worse, they owned apartments and flats in large complexes, and would be competing for tenants against lots of other landlords…which was then forcing the rents down, meaning some investors were not just in negative equity, but negative monthly cashflow. Negative monthly cashflow is where the rent doesn’t cover the mortgage payments, forcing the landlord to top it up themselves. In this situation you would usually sell the property, but if you are in negative equity…you are stuck!

Some buyers and investors who have secured a mortgage to pay the balance of the property on completion have also found themselves in a bit of a mess when the development has been delayed for some reason, meaning they can’t complete. If the buyer or investor has received their mortgage offer, and not completed within 3 months, they will then need to reapply. This then costs time and money, aswell as the emotional frustration.

Other things to consider when buying off plan is the track record of the developer…what if the developer goes bust? Is your money protected? Most of the time the answer is no, because it has been used to build the property.

The final thing we suggest you think about is the final product…is it going to be the same as what the developer promised? Will they use the same materials, will there be defects when you move in? Of course you can argue these when you move in, but do you really want to be spending 6 months arguing with the developer? That’s not fun!

Final Thoughts

So in conclusion, we think off plan developments can be a good thing, but you would need to do a lot of due diligence before entering into an agreement with a developer and parting with your cash. We also believe there are many more ways to each a good return on your investment, and gain valuable equity in a property.

If you’d like to chat more about ‘Off Plan’ investments, or other property investment strategies, feel free to drop us a line at [email protected], or sign up to our mailing list at www.emeraldpropertysolutions.co.uk.

Happy Investing!

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A HMO, or House Of Multiple Occupancy, is a property where numerous individuals live in the property rather than one group, or family. Each tenant will have their own tenancy agreement with the landlord or letting agency.

Generally a HMO property will be an all inclusive monthly rent for the tenants. The reason for this is to avoid any disputes between the tenants when it comes to arranging bills. It is often seen as quite appealing for tenants to have a fixed monthly rent so they can budget easily.

There are many pros and cons for letting out properties on a HMO basis. Below we’ll discuss some of these based on experiences of countless landlords.

Lets start with the downside of letting a HMO…

Contracts. You are dealing with multiple tenants rather than just one central contact. Meaning that you could end up with issues with all the individual tenants that need resolving, rather than just one central point of contact. You will need to ensure you have a tenancy agreement with each tenant, and will need to register their deposit individually. Cash. You need money behind you to start letting out a HMO. The property will need to be kitted out to ensure it complies with all rules and regulations of being a HMO. You are more than likely going to be responsible for providing the furniture for the property and each individual room. Security. You’ll need to ensure each room has its own lock on the door so tenants feel secure leaving their belongings in their room. You will also need to ensure front and rear doors have the correct locks on them. Thumb locks are usually sufficient, as they are secure from the outside, but are easy to open from the inside in the event of a fire. You’ll also need to consider any keys you issue to tenants, especially if you have a high turnover of tenants. It might be worth considering a keypad entry, this way you don’t need to worry about tenants losing or returning keys. Fire Safety. You will need to have a fire alarm system installed if not there already. This needs to be checked yearly. Heating. You will ideally need a combi boiler for hot water and heating. It’s unlikely an old fashioned boiler and water tank will be sufficient for 5+ people, and if something goes wrong you will need to get it fixed very quickly! Cleaning. This is entirely down to the landlord, but we recommend all landlords who own HMO’s employ a cleaner at least once a week to come and clean the communal areas of the property. You can also offer cleaning for the individual rooms for the tenants but you might want to charge a little for this. Management. Do you want to be on call 24/7 for the tenants? Do you want to be the person dealing with issues of a broken fridge or broken sofa? We recommend using a specialist estate agent or property manager to look after the property for you. Of course you will need to pay for this, but in the long run it is worth it. Of course if you live nearby and feel up to the task then you can save the money, but there’s a few other things you need to be aware of… The Law! Each local council has its own rules and regulations when it comes to HMO’s, so we suggest you speak to a local agent, or the local council before purchasing a HMO, or converting an existing property into a HMO. Licenses are generally a few hundred pounds a year, but if you are caught without one you can end up with a nice big fine!

That’s all the things we think you need to think about when letting out a HMO. Now for the good things about letting out a HMO!

It can be highly profitable versus a standard let! When renting rooms out individually, you are generally going to charge more per room than if you were going to let the property as a whole. For example, a 5 bed house in London might let for £2200 a month, whereas if you were letting it on a HMO basis you might let the rooms out for £700 per room, giving you £3500 per month. Obviously you need to factor in costs for the bills etc, but generally you should be making more per month than a single let. If you’re not, then perhaps you need to rethink your strategy! Void periods are unlikely to all come at once! Even if one tenant leaves, you’ll still be making income from the other tenants. It’s very unlikely that all your tenants will leave at the same time.

In conclusion, we think HMO’s are a good investment. Yes there is more work involved in setting up a property as a HMO, or if purchasing one you might need to pay a little more, but the yields are going to be much higher than a single let.

Once you have your system in place for solving tenant queries and issues, and also how to ensure you are at maximum capacity all year round, it will be a relatively smooth journey from here on in…touch wood!

If you’re looking to invest in HMO properties, drop us a line at [email protected] or sign up to our mailing list at www.emeraldpropertysolutions.co.uk for our weekly investment deals available.

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What does Brexit mean for house prices in the UK?

Well, so far we’ve not seen a huge amount of movement in the UK property market, however, economists are anticipating a slight drop in house prices…but not for long!

A survey of RICS estate agents revealed a drop in new buyer enquiries in June, down to levels lower than the financial crisis of 2008, reports The Guardian.

As a result, a net 27 percent expect prices to fall over the next three months (Daily Telegraph). In London, an area where house prices have continued to surge upwards in recent years, are predicted to continue falling throughout the next 12-18 months.

Having said all that, surveyors are still remaining positive, anticipating growth of 14% over the next 5 years.

What does this all mean for investors?

As property investors, we have had to continue adapting to the economic climate. There are suggestions that there won’t be any investment made in the UK, meaning a shortage of houses due to not enough being built, then on the other hand, there are suggestions that property prices will crash due to lack of confidence in the market.

The truth is, we can’t predict the future, but what we do know is that people will always need somewhere to live, so the demand for rental properties will always be there.

There is still a huge demand for UK properties from international investors, and especially since the value of the pound has dropped considerably, the UK seems a very good place for international investors to pick up a bargain.

Should we buy or sell, or wait?

If you need to sell your house today then you need to sell your house today, regardless of what the market is doing. This is the case for lots of people. As an investor you probably have a little extra bargaining power as some sellers are in a rush to sell incase the market does crash.

If you are an investor benefiting from rental income, then there really is no need to sell. If you need additional funds to finance other investment opportunities, speak to a mortgage broker about remortgaging and releasing some of the equity in your property.

On average property prices double every 10 years (based on data of the last 100 years), so if you are looking for a short term investment to sell on for a big profit in a couple of years, maybe now is not the time to do this due to the uncertainty. If you are in it for the long haul, great! Be patient, benefit from the rental income each month, and gradually you will see your capital gains in the coming years.

What about other investments?

We like to stick to property because it’s one of the safest investments out there. If you have stocks and shares, you can lose a huge percentage of your investment overnight. With a property, even if there is a property crash, providing you are still renting your property and covering your mortgage payments, eventually the value will pick back up. In the current economic climate you want to limit your risk as much as possible.

Always speak to a financial advisor before committing to any type of investment.

If you want to talk about property, sign up to our mailing list or get in touch and we can arrange a time to chat about how we can help you.

We are heading into a very volatile economic time, but remember…during the 2008 economic crash, more millionaires were made than any other year in recent history…

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I Want To Become A Property Investor

Well that’s good news! The question you need to ask yourself is WHY?

Is it to become financially free? Is it to save for your future? Is it to just give you a little extra income each month?

The other question is ‘Do You Want To Be An Investor Or A Landlord?’ 

You can be both if you like, but if you’re not a fan of dealing with tenants, changing taps, chasing people for their rent, you sound like an investor. This is absolutely fine-you just need to be aware that investors will need to employ someone to manage their property for them. Either a property manager or estate agent. We can recommend good property managers if you require one.

Being a landlord is a much more hands on role-but you will need to keep yourself upto speed when it comes to regulation, legislation and local laws. Some councils require landlords to be licensed-if you’re not licensed you may end up with a hefty fine! The other thing to take into consideration is that you are on call 24/7 for any problems-tenant gets locked out, boiler breaks, power goes out etc. All your responsibility!

If you are wanting to become a property investor to become financially free, you will need to work out exactly what you need to become financially free? Being financially free means that if you didn’t receive any income elsewhere, all your monthly outgoings would still be covered.

We would suggest having 3 tiers of becoming financially free. The first being enough money to replace your living costs-this could be your mortgage or rent, bills, car costs, credit cards, food, phone, gym membership etc. 

The second tier would be enough money to cover everything in the first tier, plus enough to cover holidays, meals out, trips, gifts and other ‘non-essential’ living expenses. 

The third tier is where you are generating enough money to do everything in tiers one and two, with additional money for further investments, luxury purchases, all bills for you and your entire family each month and year...basically you don't need to have to worry about money ever again!

Of course we would all like to get to tier three quickly, but first we need to start at tier one. The reason we do this is because it is a realistic goal, and feels far less daunting!

Once you have worked this out, you can put an investment plan in place to make this happen. This is something we can help with. At Emerald Property Solutions, we can help you put a plan in place to make your investment funds go that little bit further...

[emeraldpropertysolutions-blog]

What is a Lease Option?

If you’ve never heard of a Lease Option Property, don’t worry, you’re in the 95% of people who have never heard of it in the UK.

The reason very few people have heard of them is because of 2 reasons:

1) Lease Options have only been around in the UK in recent years. In countries like the USA and Australia they have been around since the 1970′s.

2) Investors who know all about Lease Options tend to like to keep Lease Options for themselves! 

A lease option allows an option-holder to purchase or sell a property at a fixed price (the exercise price) within a fixed period of time (the option period). Both the exercise price and option period vary from property to property, and are always agreed in advance of any deal being signed.

The purpose of you getting into property is to generate some extra money or become financially free. The whole point is to buy a house, rent it out, and make a profit. This is how you would normally buy a house:

£100,000 Purchase Price

£80,000 Mortgage

£20,000 Deposit

£250 Monthly Mortgage (Interest Only)

£50 Bills and Management

£500 Per Month Rental

£200 Per Month Net Profit

In this example you need to invest £20,000 to make £200 per month. 

The issue here is that you need £20,000 deposit, and on top of that you need to be able to get a mortgage on the property. If you have a bad credit rating, this might be tricky. 

Who Can Do A Lease Option?

Anyone! The Lease Option agreement is between two parties. The owner of a property (sometimes called the vendor or seller), and an investor (also known as a buyer).

In the UK many residential investors have been using lease options to secure an option to purchase a property and then generating a regular by renting out the property to private tenants. This gives the investor sufficient income to cover any monthly payments before deciding to exercise their option, or sell it on to a third party (also known as assignment).

The purchaser of the lease option generally pays the seller a small upfront fee for the option, which is sometimes deducted from the final purchase price.  This option can be then exercised in the future by the option holder or even sold on to a third party at a profit.  The price paid for the option can be nominal e.g. as little as pound; or can be many thousands of pounds depending on the price agreed for the underlying investment property. On top of the upfront fee, the option holder will agree to cover all monthly mortgage costs (usually an interest only mortgage), all maintenance and repairs, management, and bills, essentially taking complete control over the property.

What Is The Risk Of Doing A Lease Option?

As with any investment there is some element of risk. If the tenant you have in the property doesn't pay, or you have a void period, you would still be responsible for covering all monthly costs, including the sellers mortgage payment-just as you would if you had your own mortgage on the property.

Is There A Risk To The Seller?

The risk to the seller is if the investor, or option holder, doesn’t make the monthly payment on time, thus causing a default on the sellers monthly mortgage payment. The other risks are if the option holder didn't maintain the property and allows their option to lapse. In reality this is unlikely as the investor will want to ensure the property is in good condition for when they come to exercise their option or sell the property on, as this is the time they will see the real profit.

We recommend both investors and vendors use a specialist Lease Option solicitor when doing a deal of this type.

Why Would Anyone Who Owns A Property Do A Lease Option?

Due to the volatile UK property market, sadly some property owners who purchased properties during a boom period, are now finding themselves in negative equity. Negative equity is where the value of the property is less than the outstanding mortgage. The owner has 2 options-one is of course to stay in the house and keep paying the mortgage, the second is to do a lease option. The upfront payment will help them move house, and agreeing a fixed purchase price for at least their outstanding mortgage guarantees they can sell their house at some point in the future for at least the price they need to sell it for.

Why Would An Investor Do A Lease Option Over Just Buying The Property?

Taking on a Lease Option allows the investors funds to go much further, giving a far greater ROI. If you are purchasing a house outright you would need to save up a lot of deposits! 

In the below example you might only need to invest a total of £4-5000 to make the same monthly return...if you had £20,000 you could do this 4 or 5 times. What would you do?

Lease Option Explained...

Owner A has a property worth £80,000. Their outstanding mortgage is £100,000. The negative equity on the property is £20,000.

Their monthly mortgage payment is £250. Other bills are £50.

Owner A has been offered a new job working in a different city and wants to sell their property. They don’t want to become a landlord, but don’t have sufficient equity to clear their mortgage.

Investor B pays Owner A an option fee of £1000 for a 5 year option to purchase the property at £100,000. Investor B also agrees to pay the monthly mortgage payment of £260, plus any bills associated with the property.

Investor B now has 2 options. They can either rent the property out for £500 a month, which gives them a net monthly income of £200, and buy the property themselves within 5 years time for £100,000. 

Their second option is they can find a Tenant Buyer* who will pay a ‘super rent’ (this will be explained in our Rent To Buy blog), of £600, and agree to purchase the property for £110,000 within 5 years time. They agree to an upfront payment of £3,000 which is deducted from their purchase price.

So now Investor B is cash flowing £300 per month, he has made £2000 net income upfront (£3000 from the tenant buyer - £1000 to Owner A), and will make a further £7000 within 5 years time.

*Keep an eye out for our Rent To Buy blog for more information on Tenant Buyers.

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