A widely favoured property investment method amongst astute investors is Lease Options, also commonly referred to as Rent to Own. This approach has proven invaluable in my property investment endeavours. I employ this method both for acquiring property and, during sluggish property markets, for selling it whilst achieving the full listed price.
What Is a Lease Option?
A lease option is a contract that provides a tenant the opportunity to buy the leased property either during the lease term or at its conclusion. This arrangement also restricts the landlord from selling the property to other potential buyers. At the term’s end, the tenant has to decide to either proceed with the purchase or relinquish the option. This is commonly referred to as a rental agreement with a purchase choice.
A lease option provides a potential purchaser with greater leeway than a typical rent-to-buy contract, where the tenant is obligated to purchase the property at the lease’s termination. The property’s price is predetermined by the tenant (the prospective buyer) and the landlord, generally based on the present market value. This arrangement enables the tenant to lock in the current value for a future purchase.
For this privilege, the landlord usually imposes an initial fee, which could be around 1% of the property’s selling price. If the tenant opts to acquire the property after the lease, this fee contributes to the initial deposit. Lease options are particularly beneficial for those improving their credit rating or lacking adequate savings for an initial deposit. Nonetheless, several aspects of lease options should be weighed up.
How do we profit from it?
When it comes to purchasing, this strategy is remarkably effective. I’ve pinpointed properties I wish to acquire without taking out a mortgage. So, I propose a lease option to the seller for a duration of 5 years. This entails making regular lease payments, but unlike standard renting, I have the choice to buy the property anytime within these 5 years. However, there’s no obligation for me to purchase.
You might wonder about the logic behind this. Imagine foreseeing that the property’s value will rise by 15 to 20% over the next five years. You could then profit a hefty £50,000 by selling it to a third party without ever officially owning it. Quite an enticing prospect, isn’t it? And this isn’t just hypothetical.
Make Money as A Middleman
Using the lease option approach, you can act as a facilitator and earn between 20 to 50 thousand per deal. Secure a property through a lease option, find a tenant or buyer, and collect a down payment (usually 3-5% of the property’s value). You might’ve only paid 1-2% initially. Then, charge them a slightly higher rent than what you owe the original seller. Once the lease period ends, if they choose to buy, the difference between the agreed price and the current value is your profit, which can be quite significant in some regions.
When attempting to sell your property in an area with a multitude of sellers nearby, it can become a challenge to secure a sale without significantly reducing your asking price. Especially if you have an outstanding mortgage, there’s only so low you can feasibly go, right? So, how do you navigate this? A potential solution is to employ the lease option method. This strategy is ideal if you’re not in urgent need of accessing all your equity immediately. If you can afford a brief wait to fully cash in, then this method can be quite beneficial. You can achieve your full asking price, avoiding the hefty reductions your neighbours might be compelled to offer.
I typically offer a lease option for a period ranging between 1 and 2 years, requiring an upfront deposit of 3 to 5%. Once this term concludes or even during it, the individual must decide to buy or risk eviction by the end of the period. The initial deposit, which is always non-refundable, would be forfeited, ensuring I retain it.
Lease Option Terms
There are several key elements within lease option agreements, beginning with the lease duration. This specifies the time the tenant will reside in the property. Equally vital is the purchase option price, which stipulates the cost at which the tenant can opt to buy the property. Sometimes, rather than a fixed sum, a formula might be provided to deduce the price (for example, the Official Kelley Blue Book value at the lease’s end).
Another component is the option fee, sometimes referred to as option consideration. This initial non-returnable payment is made by the tenant to the property owner, guaranteeing their right to potentially buy the property during the lease. Some agreements may include rent credits, which can occasionally be used to counterbalance fees or reduce the eventual buying price.
There’s often a designated period within lease options when tenants must inform landlords of their decision to utilise the purchase option. It’s essential for tenants to observe this period, lest they forfeit their purchasing rights.
Lease options typically come with clauses for default and termination. These provisions detail the consequences if either party doesn’t fulfil their responsibilities. Some agreements might offer tenants the chance to prolong the lease duration or the decision-making window if they need additional time to mull over the purchase decision. Sometimes, extending might come at a cost. Finally, a lease option might necessitate a property valuation and survey to ascertain its present worth and state when the buying option is activated. This essentially safeguards the buyer from spending excessively on a property that’s not up to par.
Lease options offer homeowners a method to lock in a potential buyer without officially listing the property. By paying an initial fee, the tenant secures the option to purchase the home after their rental period, usually at a favourable rate. This setup provides potential buyers with added leeway, helping them accumulate savings and enhance their credit whilst gearing up to purchase a property.