Hedge Property Sales

Lease Options

Options are versatile and powerful legal instruments which are changing the way residential property is bought, held and sold in the UK.

Put simply, options are written agreements that give the holder choice or freedom. Depending on the wording in the document, the owner gives exclusive freedom to buy, use or sell the property, or a combination of these freedoms. If the buyer chooses to buy whilst the option is in place, the seller must sell. That is the essence of an option.


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There are six essential ingredients of Option Agreements:
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  1. willing seller;
  2. written document;
  3. specified period of time;
  4. option fee;
  5. purchase price; and
  6. willing buyer.

Property options fall broadly into two categories: purchase and lease. Both are potentially useful to landlords.

A purchase option is often short-term and grants the holder the freedom to buy the property at an agreed price within a specified period of time

A lease option is a purchase option with the added freedom for the holder to lease or use the property during the option period.

A property owner may grant a lease option to a tenant buyer, (a tenant who also has an option to buy), so allowing him or her time to save a deposit, arrange finance, add value or wait for the property to appreciate. The tenant buyer can choose the best time to ‘exercise the option’. Serving notice in this way obligates him or her to complete the purchase, usually with a traditional mortgage. This is known as ‘rent to own’.

Instead of increasing his or her personal debt and liability, option holders who take control of property before it is bought will simply make a regular payment to the seller or pay the mortgage direct on the owner’s behalf, effectively taking over the existing finance.

Investors can have the satisfaction of helping those in need; either those who need to be free of a property which has now become a liability due to relocation, relationship breakdown and other pressing reasons; or those who are forced to make new housing arrangements because they cannot maintain mortgage repayments themselves.
Options are not without risk – but the risk is generally limited to the option fee paid and any costs incurred during the option period. In many cases options can create positive cash flow, since the monthly payments to the seller or mortgage provider are usually lower than payments taken as rent. If property prices increase, the option holder stands to benefit substantially.

Property options in practice

Option agreements can provide relief for homeowners in many situations. Take Ms D and her partner. They own a two-bed semi with a conservatory and well kept gardens in a good part of County Durham but had moved 40 miles away to settle in a rural location. They were unable to sell the house. Concerned about vandals and burglars their quality of life was suffering. Unwilling to become landlords, they were paying £490 a month for a house which had been empty for nine months.

Rather than allowing the situation to spiral out of control, they granted a 48 month lease option with the purchase price set at £97,000; less than the marketed sale price. The option holder contributes £300 a month, which covers the interest on the mortgage. An excellent tenant was found for the property. Ms D and her partner can move on free of the hassles of property management, and a prefect home has been provided for a happy family.


Leasing optionsRent to own goes a step further. It is a simple arrangement allowing a tenant to live in the property, paying rent in the usual way. The main difference is that the tenant has a legal document giving him, or her, the right to buy the house within an agreed time period at a set price. Tenant buyers tend to be people who can’t get a mortgage immediately, or don’t yet have the needed deposit, but have a strong prospect of securing finance in the future.

Option agreements are changing the way many are buying and selling property in the UK. They can be used to control a substantial portfolio without the need for personal mortgage debt or liability. Hard pressed landlords can re-organise their finances and transform portfolios. Through rent to own, property options are opening doors for potential homeowners when finance is not readily available.

In short, these simple yet powerful strategies may well be an option you can’t refuse.


 

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