There's no doubt about it! Lease option is a hot topic in property investment.
You might have heard people talking about it or courses offered to you. Before you jump on the "bandwagon", we would like to give you 10 facts about lease options. We've taught over 200 people in our Milton Keynes office how to use this tool to acquire properties using no mortgages based on our extensive experience in doing these deals.
Myth #1 You can buy a property for £1 only
Fact
Yes, legally, you can control the property for £1. The £1 is the "option premium" or "option fee" you pay to the seller to make the deal legally binding. However, just like buying properties via the traditional route, there are other upfront costs, such as:
1. Generating lease options leads
2. Legal fees - could be anything up to £500 + VAT
3. Possibly the seller's legal fee
4. Putting the property in a "lettable" condition
5. Void periods
6. Repair and maintenance
If anyone tells you that you don't need a solicitor to go over the deal, then stay away from this person! Legal conveyancing is about protecting your interests if things go wrong. Completing on a lease options deal does cost more than £1 in reality, but if you've structured the deal properly, you should get this money back soon.
Myth #2 You don't need to do legal searches
Fact
Yes, but only to a certain extend. Legal searches are not a legal requirement in a lease options deal. But the question you need to ask yourself is:
" Do I want to nurture a deal for 5 to 10 years only to find that when it's time to exercise my option to buy, the property is not mortgageable due to defects or adverse environmental conditions?"
The types of search you decide to do are entirely your choice but a "title search" is a must.
Myth #3 You can use a simple Purchase Option to close a deal
Fact
A Purchase Option is far from adequate! If you don't have a water-tight legal framework that protects you from all eventualities, you become exposed if things go wrong. At best you lose your deal after many years of nurturing it and at worst, you find yourself in potential litigations.
Myth #4 Lease options and Rent-to-Own are the same thing
Fact
No they are not. It never ceases to puzzle us why many people lump the two together! A lease option is an instrument which you use to control a property and rental cash flow without using a mortgage whereas in a rent-to-own scenario, you "grant" an option to a tenant so you tenant, who now becomes your tenant buyer, can rent the property first with a view of buying it in the future.
If you already own this property with a mortgage, then granting this option to your tenant buyer will simply create your exit strategy. If you have controlled this property from your seller with an option, then this becomes a "sandwich option" deal.
Myth #5 You have to find a tenant buyer to do "Rent to Own" deals
Fact
No, you don't! Why do you want to cap your potential future profit by granting an option to a third party when the deal already stacks rental wise? In fact, insisting on finding a tenant buyer as your only strategy is the dumbest thing to do in a flat market!
Although tenant buyers, in theory, will look after the property at their own expense, you're asking tenants to pay an upfront option fee plus "rental premium" with the view of the market rising. This is a "call option". With the market falling or being flat, this is very difficult to persuade tenants to become tenant buyers in practice.
Rent to Own is a very using instrument in the right circumstances. But you don't always have to do it. In fact it is one of the 11 strategies we teach in our One Day Intensive Course.
Myth #6 A sandwich option is risk free to you
Fact
In theory, in a "back-to-back" sandwich option deal, you can just take the "profit in the middle" when the options are exercised. Are you aware of the risks involved?
e.g. When your tenant buyer exercises their option to buy, you give Notice to your seller to exercise your option so you become obligated to buy the property. But what if your tenant buyer has the mortgage withdrawn by the lender in the last minute and fails to complete?
Myth #7 It's a simple concept that can be applied straight away
Fact
No doubt the theory of lease options is no rocket science and that's why anyone who understands it can more or less call themselves "expert" to teach it. However, to successfully complete and nurture a deal, it takes experience and many mistakes made in practice.
With Vincent's record of 30,000 property leads in the past 2 years and our combined 254 deals, we're in a position to share the many "cock-ups" we've made with our lease options deals. This will stop you from making these expensive mistakes and put you at the top of the learning curve.
Lease options are simple but not always easy!
Myth#8 It's easy to negotiate with sellers
Fact
If you approach a seller with the same mindset of a BMV investor, you won't do many deals. In lease options, you don't "negotiate" with a seller but communicate effectively. Communication is crucial which can make or break a deal.
Nonetheless, lease options are so flexible that you can help a seller in all sorts of situations, even when their properties are in negative equity! Therefore, you're no longer a "BMV predator" but a resourceful "problem solver".
Myth #9 You can use the Power of Attorney to cut the seller out
Fact
The Power of Attorney is when the seller grants the "power" to a third party to make decisions on their behalf in their absence. In a lease option deal, it helps the investor exercise the option to buy the property even if the seller cannot be contacted using the Power of Attorney.
Contrary to what people believe, the Power of Attorney must not be abused by the investor. The main reason is that the Power can be rescinded by the seller at anytime. Also, using the Power of Attorney to do things against the will of the seller, such as remortgaging the property without the seller's agreement" could land you in a potential lawsuit!
A successful lease options deal is a partnership between you and your seller; very much like a successful relation between a landlord and tenant in a standard BTL. It should be a win / win not just at the time when you agree on the deal, but throughout the whole option period.
Fact #10 Once I've completed on the deal, there is no risk at all as far as the deal is concerned.
Fact
Even when legally you have the right but not the obligation to purchase a property at a particular price, the seller could have a "change of heart" when they see the property has increased substantially in value. There might be a chance that the seller would challenge the legal documents legally, causing you unnecessary hassle, time and money.
Therefore, apart from making sure the legal process is "water-tight", you need to manage the whole process carefully so that the seller can perceive the deal is "win / win" throughout the relationship. It may be a good idea to review the terms of your agreement periodically, such as offering a percentage of the profit to the seller if the market has risen above expectations. Even if you have the upper-hand, these situations are best avoided.
If you want to learn lease options the proper way, follow this link
http://www.wealthdragons.co.uk/advice.htm.
Best regards,
John Lee & Vincent Wong
Photo's from Previous Meetings:-
http://picasaweb.google.co.uk/mrandmrsraiBerkshire Property Meet TV:-
http://www.youtube.com/user/berkspropertymeet
