The following article looks at a Lease Option Purchase, an increasingly popular arrangement for acquiring Below Market Value property. Whether an investor/landlord or tenant/buyer, lease option can be an effective and efficient property-buying tool as no new mortgage is required.

1) the investor/landlord, who wants to acquire a property without deposit or obtaining a mortgage;

or 

2) the tenant/buyer with poor credit rating or non-UK residential status, which is getting in the way of obtaining a mortgage.

a) someone to rent an already mortgaged property; 

b) the current mortgage payment to be taken over by the lessee/buyer; and, 

c) the option-to-buy the property within the lease-term.

1. Can I afford costs and the Option Fee?

Total legal costs are typically £1,500-2,000 and the lessee/buyer pays them. The Option Fee is a requirement to validate the contract and this extra fee can be as little as £1 (one-pound) or equal to one or two month's rent or between 3-10% of the purchase price depending on the circumstances of the lessor/seller. The Option Fee is in addition to the mortgage/rent required and some/all may go towards a deposit on the property when purchased at the end of the lease term.  

In the same way as withdrawing after exchange of contracts for a traditional property purchase, there is usually a financial penalty to the lessee/buyer should they withdraw from the option to buy.

The lessee/buyer will need to obtain funds (mortgage/loan), to execute the option to purchase the property. Failing this they may be able to negotiate an extension to the lease-term or have to withdraw from the option. A period of regular monthly payments to a lease option arrangement should improve credit worthiness and thus, attract a more favorable mortgage/loan than might otherwise be the case. It is advisable to speak with an independent mortgage broker at outset.

3. Can I meet normal household expenses after I buy the property? Tenant/buyers need to satisfy themselves they will have sufficient income for the upkeep of the property after it has been purchased, factoring-in: future mortgage payments; property taxes; insurance; and, maintenance costs.

 

Investor/Landlords need to be sure they will have the property occupied.

STEP 1. Selecting a property ~ from our website may have the added advantage of lease option purchase with below market value purchase.  Links are provided within our website to undertake one's own due diligence for valuation and rental income assessment prior to reservation.

STEP 2. Getting a property surveyed ~ is sensible prior to committing to the lease option, which the lessee/buyer *pays for. Following reservation, an independent surveyor is instructed to undertake an inspection. If problems are revealed, the lessee/buyer will need to make sure defects won't compromise any future mortgage application and that the contract specifies who is responsible for making good the repairs.

 

The costs for fixing more serious defects will need to be negotiate with the lessor/seller at outset and an allowance against the purchase price agreed to enable the lessee/buyer to make good the repairs if the option to buy is exercised.

STEP 3. Negotiating ~ the purchase price, lease-term, the amount of initial option fee, the amount of the monthly payments that will go toward the deposit and who is responsible for any immediate repairs, is flexible as the lessor/seller is effectively being relieved of their property debt (the mortgage). This places the lessee/buyer in a position of strength but, remember to be reasonable.

 

The Lease Option contract should also allow the lessee/buyer the right to sell the property within the term of the lease, settle the agreed purchase price and enjoy any profit without restriction.

STEP 4. Paying the option fee and signing the contract ~ should only occur once the lessee/buyer is comfortable they understand and accept the terms of the contract, making sure the lease option contract specifies a fixed purchase price for the property. Your Solicitor will advise.

STEP 5. Obtaining insurance ~ is a wise precaution to protect one's interests in the property. Treating this purchase as already yours is sensible.

STEP 6. Maintaining the property ~ in good condition during the lease-term may generate extra equity as a well maintained property increases in value which in turn increases the proportional amount of deposit. This should help attract a more favorable mortgage offer when the option to buy is exercised.

STEP 7. Applying for a mortgage/loan ~ is sensible well before funds are required and not less than 3-months in advance of the end of the lease-term. A clean lease period may even qualify the lessee/buyer for a re-mortgage with the lender who held the original mortgage, attracting a lower interest rate and quicker administration than would otherwise be the case than by applying for new mortgage with a different lender. 

As with all major borrowing, keep in mind that unexpected changes in personal financial circumstances may prevent one qualifying for a loan when required. The same can be said of interest rate rises during the lease term. 

STEP 8. Completing on the property ~ takes 4-6 weeks, about half the time it usually takes to obtain a BTL mortgage. Once contracts are exchanged, you now own an option-to-buy this property.

This article is a general guide only and is not intended to replace appropriate, financial or legal advice. 

 

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