Skeptical over Lease Option agreements

by Readers Question

10:09 AM, 5th June 2017
About 2 years ago

Skeptical over Lease Option agreements

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Skeptical over Lease Option agreements

Can any member comment upon their experience using ‘Lease Option Agreements’ to build a property portfolio?

A friend of mine has just returned from a 3 days intensive training course run in Wolverhampton, and is full of enthusiasm based upon what he learned.

I’m just a wee bit skeptical over the ease in which this system of building a rental portfolio without much in the way of initial capital can work in practice?

Cheers,
Jim



Comments

Neil Patterson

10:17 AM, 5th June 2017
About 2 years ago

Hi Jim,

Many BTL lenders got their fingers burnt pre-credit crisis with lease option agreements as most turned out to be No Money Down schemes with inflated valuations.

Therefore they will not usually entertain lending and their fraud departments have many warning procedures in place to catch them. If you do not inform the lender of the true nature of the purchase transaction and where the deposit is coming from they consider this non-disclosure and it is possible to be black listed on the National lenders Hunter match so be warned.

However, I do not know what is being promoted so would not want to jump to any conclusion without the facts.

Jim Fox

12:48 PM, 5th June 2017
About 2 years ago

Thanks for that Neil, I'll pass on your observations to my mate.
Cheers,
Jim

Ian Narbeth

14:22 PM, 5th June 2017
About 2 years ago

Hi Jim
Just Google "Lease Option Agreements" and you will learn about the issues/problems.

If it is so easy to make oodles of money with "No money down" or to "Buy a house for £1.00" why are the promoters of a 3 day intensive training course in Wolverhampton doing training courses at all instead of using all their wonderful knowledge and skills and keeping the "secrets" to themselves? Surely they could earn more from property than from flogging courses!?
Beware get rich quick merchants.

Gary Dully

3:07 AM, 6th June 2017
About 2 years ago

If you haven't done a Lease Option, you are missing a very effective way of Controlling, but not owning a property.

I have 4 properties on lease options,
They are very good, providing the owner doesn't go bust.

This may ruffle a few feathers, so let me give you an example, but in the commercial sector, where they are standard practice.

For Example:
You are setting up a company called Better Bathrooms and you have a previous expertise in paper clips and clipboards.
Very successful, but the bathroom venture is new and has limited Capital available.

You want to buy 10 stores to cover Lancashire.

The cost to buy each store and refit would cost £300,000 each.
The refit is £20,000,the rest is the property.

You don't have the funds, so you suggest a long lease, to match the landlords mortgage term, with an option to buy each store at the full £280,000 or higher than market value in 10 years time, from each landlord, with an initial option fee of £1 each.

In the meantime you agree to rent on a full insure and repair basis, with the 'Option' to buy it at any time from day one until year 10 expires.
The rent is negotiated with a 25% discount because of the long term involved.

Would you do it?

You would be mad not to....

Your choice is £3,000,000 as a normal purchase or £200,010 on lease options and Refurb costs.
Each amount would result in 10 refurbished stores.

That's a difference of £2,790,000 in expenditure, for the same result.

Now think of Boots, William Hill, Plumb Centres, KFC, Halfords or any major chain.

You don't think they own those stores do you?

Chances are they pay monthly rent and have an 'Option' to buy if each branch is successful.

When I ran Halfords and Tandy stores, the companies only owned about 10 stores each the others 800+ were leased on option agreements.

Now move the same principle to the residential market.

It's not common, I grant you, but if you use specialist solicitors it's perfectly legal and stands up to FCA and legal scrutiny.

Ownership never changes, there is a restriction RX1 placed on the title to prevent a sale, by the owner, but not repossession by a liquidation officer.

You are actually renting on an AST , Management agreement and possibly Power of Attorney.

The key is a lenders 'Consent to Let', YOU MUST PROVE IT or the solicitors won't clear the contracts.

Without it, your building insurance and Public Liability cover won't be worth the paper it's written on.

If you default, go bust or die, your option agreement is normally cancelled and the restrictions become void.(Specialist solicitors must be used).

It's a win-win

(Stamp duty is chargeable on long leases, so expert advice is required)

The landlord is chuffed to f*uck as he has a guaranteed income for 10 years and doesn't pay repair costs.

The option buyer splashes out for Refurb and £10 and he or she has 10 houses to rent out, waiting for the value to increase enough until they can buy enough Below Market Value to bridge for as long as the CML have set their criteria for.

Your friend will however fail, if he thinks he will become rich by using lease options after such a course.

You have to build trust and their solicitor will soon sniff out a dodgy deal and advise their client against it.

The solicitors will advise against any deal that isn't balanced to the owners benefit Your friend should aim to achieve their aims first in any deal.

The owners therefore need to be Motivated or in Distress to enable the solicitors to agree to the deal.

They are very good, I have had mine for over 4 years and the properties produce a fair profit in rent each month.

They cost me about £2600 in legal fees as opposed to £300,000 in mortgages + fees + stamp duty etc.

Jim Fox

6:56 AM, 6th June 2017
About 2 years ago

That's an interesting opposite view to those already expressed Gary!
In practice, how do most lenders (either residential mortgage or BTL mortgage providers) react to their mortgagors signing up to such deals?

Gary Dully

9:41 AM, 6th June 2017
About 2 years ago

Reply to the comment left by "Jim Fox" at "06/06/2017 - 06:56":

Well Jim,

They reacted well before you got involved, didn't they?

They already granted 'Consent To Let', as currently, most of these deals are done with existing BTL Landlords that are basically worn out and knackered.

Normal households will require that consent, if they don't get it, the deal will fail, the solicitors will not risk their license for a crummy deals worth of an option fee.

Remember that you will normally be looking only for distressed and motivated owners.

The properties that I have an option on were owned by long distance investors that couldn't and didn't change a light bulb.

The houses were boarded up or void for over a year. They still own the properties, their mortgage is paid, the properties are insured, the council tax is paid and I pay for repairs.

Believe me they have no complaints about lease options, they get on their knees and prey to whatever deities they believe in, every week as their rent goes into their bank account and their properties get looked after, whether Rented or not.

The key is the professionalism of the option owner.

As an existing landlord my credibility was plain to see.

Their solicitor will scream like a demented pig in a lift shaft, if the deal is dodgy.

The course providers are probably offering access to their lists of investors, who want an option property for a fee of 1.5% of the properties value or 50% of your friends fee if deal packaging.

If they just offer the training your friend will possibly fail without a bit of mentoring.

If they are packaging deals, they will have to register with the property ombudsmen and will require PI and anti money laundering certification, as they will be classed as a letting agent or estate agent.

The last thing we need is more red tape from the FCA, so tell your 'friend' to look for distressed or motivated property owners only, use only specialist solicitors and look to provide a win-win situation.

Gary Dully

10:00 AM, 6th June 2017
About 2 years ago

Reply to the comment left by "Ian Narbeth" at "05/06/2017 - 14:22":

The same applies Ian, when you Google Beneficial Interest Trusts for dealing with the effects of Section 24.

The key is the Solicitors used, they are 'Specialists' in the relevant field.
They have to be completely FCA and SRA compliant.


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