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articles > Beyond Lease Options
Article > Beyond Lease Options


Article kindly supplied by

Richard Shepherd
02 Property Consultants, 17 Cavendish Street,
Darwen, Lancashire, BB3 1ES
01254970014

"51 Property Option PowerPlays"


The last two years have seen the advent of lease options in the UK residential property market. Investors are extremely excited by having another tool in their arsenal that they can use to acquire and profit from property. But let’s take a moment to reflect on what they are:-

The Option

An option agreement gives you, the investor a right to buy the property over a specific period of time. You can buy it if you want to, but you don’t have to if you don’t want to. For instance someone might give you the option to buy the property for 10 years just because they’re currently paying 2 mortgages (having already moved out) and really cannot afford both of these payments. Let’s say that the house is worth £100k and your seller gives you the option to buy the house for £90k. In 10 years’ time you would hope the property was now worth £200k – yet you would still buy it for jsut £90k. But why would the seller do this?


The Lease

Sellers obviously need to be getting something out of this arrangement. Traditionally how lease options work in the United States is that you as the investor would sign an lease (in the UK an Assured Shorthold Tenancy agreement) with the seller and the ‘rent’ would cover the seller’s mortgage payments. Let’s say their mortgage payments were £300 per calendar month. You would pay £300 per calendar month in rent and then let the property out for £500 per calendar month making £200 per calendar month in profit.

However, looking at this agreement legally fails at the first hurdle. When Shimon Rudich of MS-Law solicitors looked at it he found that the seller was in breach of the mortgage conditions which state “Thou Shalt Not Sublet!”. In addition the invest never had any intention of moving into the property so the AST was redundant.

What Shimon Rudich did was to replace the AST with a management agreement, so now you are managing the property in much the same way that a letting agency manages a property. The new agreement became known as a Managed Option Contract.


Sandwich Options

Sandwich Options are pretty much considered as the zenith of lease options. Let’s take the above example. You have the right to buy someone’s house for £90k that is really owrth £100k any time over the next 10 years as long as you cover your seller’s mortgage payments of £300 per calendar month.

Rather than ‘only’ renting it for £500 per calendar month, with the Sandwich Option you grant an option to the tenant giving them the option to buy the property in 10 years time. This way you collect, say £3,000 up front from the tenant buyer in exchange for the option agreement (this would be credited against the sales price when they buy).


In addition to the £500 rent they are then paying each month (£200 pcm cashflow to you!) the tenant-buyer also pays a ‘top-up’ of, say £150 per month which also credits to the purchase price of the property when they buy it.

This way each month they are living there they are making it easier for themselves to buy the property.


Make First Time Buyers Happy


In this way, the investor extracts another:-

£150 pcm x 12 months = £1,800 X 10 years = £18,000

From the deal up front and during the lifetime of the option – clearing £350 per calendar month from the property.

The tenant buyer meanwhile ‘buys’ the property over an extended period of time when they couldn’t have qualified for a mortgage straight away.


Make First Time Buyers Happy

Let’s say that the investor grants the tenant buyer and option to buy this property at £120k even though at the moment it is only worth £100. If the tenant buyer builds an extension on the property and raises the value of the house they can still buy for, say £120k when the larger house could be worth £250 10 years later. But this value is theirs rather than the landlord’s.


Criticism Of Sandwich Options

The main criticism of sandwich options (besides the legal standing of the tenant buyer) are that the investor is literally gifting away most of the capital appreciation of the property. If the property doubles in value so it is now worth £200k and the investor grans the option to the tenant buyer to buy it at £120k then the investor is gifting away £80,000 in capital growth for a mere £150 per month.


This is the main reason why Shimon Rudich, Hanif Khan & Richard Shepherd of Bluetree Investments wrote a 68-page eBook on lease options demonstrating other methods across residential property sector but also land, developments and even commercial properties to profit from property using options that will have you thinking completely outside the box.

 

The best bit is that this 68-page eBook is absolutely free and you can download it from HERE

51 Power Plays! - Get Yours


The long awaited
"51 Property Option PowerPlays"
manual by Shimon, Hanif & Richard is now officially on sale!

Click here for all the info, and to grab your copy now

 

Richard is a full-time property investor who has bought over 50 properties in a couple of years and is still buying properties. Over the last few years he has become very interested in lease options and the posibilities for profit without ownership.

He is also the Co-host of the Manchester Property Networking Club.

 

 

 

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51 Power Plays! - Get Yours


51 Property Option PowerPlays


The long awaited
"51 Property Option PowerPlays" manual by Shimon, Hanif & Richard is now officially on sale!

Click here for all the info, and to grab your copy now

Network, Network

Manchester PNC


Richard Shepherd is also the Co-host of the Manchester Property Networking Club which was formed in July 2006. Every event provides education with expert speakers as well as Power Networking and other opportunities for property investors to move themselves forward! They usually go for a meal afterwards and everybody is welcome to join us in a late informal setting.

They meet on the last Monday of every month at:- The Brindley Room, Dukes 92, 18-20 Castle Street, Manchester, M3 4LZ


www.manchesterpnc.com

 

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