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). |
