Lease Options and Let to Buy in Property by Letting Focus
As ‘No Money Down’ financing for buy-to-let investors has virtually been pretty well ended by the UK’s mortgage lenders (when they finally wised up to how much they personally had to lose in such transactions), so other ways for property investors wanting to make money out of property with less than full financial commitment are being marketed.
One of the latest “kids on the block” is so called Lease Option Property Schemes or Let to Buy or Rent to Buy Schemes.
LEASE OPTION PROPERTY SCHEMES
How it works is like this.
I, as a property investor, set up "a lease option scheme" with a tenant in which the tenant gets to move in and buys option to buy the property from me, say 12 months hence.
Why would I do this, you ask?
Well, the idea is that the tenant turned possible buyer will pay the investor not just the rent under a tenancy agreement but also a premium for a separate option contract under which the tenant can (provided always that he meets all rent payments) exercise the option to buy the property at some future set date or dates.
They should also have an incentive to look after the property better - being as they will eventually own it.
The advantage to the tenant is he gets to fix the house price now (and so before property prices race away completely out of his reach.)
The advantage to the investor is that I get more money from the tenant – because I get a Lease Premium on top of the normal rent.
The advantage to any marketer of such a scheme is that he gets to teach me how to do it and no doubt also a cut from the legal fees associated with setting up one of these fairly complex schemes.
DEFAULT RISK
But what would happen if I, as owner default on my mortgage payments to my lender?
Does the tenant - buyer’s option also lapse? Where would that leave him?
I wondered what the Council of Mortgage Lender’s (CML) advice on this would be as it seems quite a people are interested in these kind of schemes now.
And sure enough they did have a view.
They said, and I quote, “(Our) understanding is they are two separate agreements. First there is the mortgage between the landlord and the lender – if the landlord defaults, they may be subject to possession proceedings, and if the property is taken into possession it will be sold to recover the debt. The second agreement between the landlord and then tenant will be secondary to this. The lender has first charge on the property.”
NO SECURITY
So there we are, straight from the CML’s mouth as it were.
What the CML are saying is that “the tenant turned possible buyer” has no REAL security at all where the owner has a mortgage and defaults.
Maybe I missed something very obvious which means these schemes can work.
I'm assured by a few people in the industry whose opinion I respect that they can work if they are set up right.
I hope so or in about 5 years the press may cotton on to the story that lots of tenants have lost out under lease option contracts that have been set up wrong or unfairly.
I predict that in 8 years time the FSA will end up banning Rent to Buy and Lease Options as they have already effectively banned some of the old practices in Sale And Rent Back.
NO TAKERS
With house prices going up more slowly now I cannot see too many takers for these schemes among the tenant population, right now.
However, I can see the attraction (to the tenant / would be buyer) when house prices are rising fast.
But right now it seems a bit of a stretch to tie yourself to a specific property and a lease option with a private owner (which has no security anyway and which appears to be subordinated to the mortgage) when you can instead just rent and have more freedom and the flexibility to buy a property when and where you want - and when you are ready to do so.
If you are a tenant and you are interested in doing such a deal with a private landlord you should check what happens to your Lease Option to Buy if the landlord were to default on his mortgage.
If you want to find out about the more simple and proven ways to make money in property, please ask us at LettingFocus.com
ABOUT LETTINGFOCUS.COM and DAVID LAWRENSON
We are LettingFocus.com - the landlords’ expert and I’m David Lawrenson, the author of “Successful Property Letting” - the UK’s top selling property and buy to let book for the last 3 years.
I have been a landlord and property investor myself for over 25 years.
At LettingFocus we offer independent unbiased seminars for buy to let investors and landlords as well as one to one advice covering all aspects of being a landlord and investing in property.
Unlike many in the still largely unregulated buy to let and property “advice” business I am not linked to a property company, developer, estate agency or bridging loan provider.
As such I am able to give unbiased independent advice on where to buy (which areas), what type of property to buy, when to buy and how to buy property at a low price. I can also explain how to reduce the risk of getting a bad tenant.
CHECK OUT THESE PAGES AT OUR SITE LETTINGFOCUS.COM:
Our Events only take place twice a year.
For our NEXT SEMINAR AND NETWORKING EVENT for Landlords and Property Investors click here:
Next Property Investing Seminar and Networking Event
We have GREAT OFFERS for landlords too, Click here: Services and Products for Landlords to see our Landlords Resources (Useful Links) page. (Selling services to landlords and property investors and have a national coverage? You could be a partner, please get in touch!)
For general info on our SEMINARS AND CONSULTING click here: Property Seminars, Networking Evenings and Consulting
ONE TO ONE CONSULTING click here: Property Consulting
CLIENT TESTIMONIALS from past customers click here: Testimonials
BUY THE BOOK click here: Buy the Book at Amazon
THE HOME PAGE OF THIS BLOG click here: Blog
THE HOME PAGE OF OUR MAIN SITE click here: LettingFocus Home Page
To JOIN our Free QUARTERLY NEWSLETTER simply send an email to david@LettingFocus.com - Please note we WILL NOT send spam or sell our mailing list to advertisers!
IF YOU HAVE A SITE WHY NOT LINK TO THIS BLOG OR OUR WEBSITE?
Copyright of Blog: David Lawrenson 2009. This blog is updated roughly once a week usually on a Monday or Tuesday.
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One of the latest “kids on the block” is so called Lease Option Property Schemes or Let to Buy or Rent to Buy Schemes.
LEASE OPTION PROPERTY SCHEMES
How it works is like this.
I, as a property investor, set up "a lease option scheme" with a tenant in which the tenant gets to move in and buys option to buy the property from me, say 12 months hence.
Why would I do this, you ask?
Well, the idea is that the tenant turned possible buyer will pay the investor not just the rent under a tenancy agreement but also a premium for a separate option contract under which the tenant can (provided always that he meets all rent payments) exercise the option to buy the property at some future set date or dates.
They should also have an incentive to look after the property better - being as they will eventually own it.
The advantage to the tenant is he gets to fix the house price now (and so before property prices race away completely out of his reach.)
The advantage to the investor is that I get more money from the tenant – because I get a Lease Premium on top of the normal rent.
The advantage to any marketer of such a scheme is that he gets to teach me how to do it and no doubt also a cut from the legal fees associated with setting up one of these fairly complex schemes.
DEFAULT RISK
But what would happen if I, as owner default on my mortgage payments to my lender?
Does the tenant - buyer’s option also lapse? Where would that leave him?
I wondered what the Council of Mortgage Lender’s (CML) advice on this would be as it seems quite a people are interested in these kind of schemes now.
And sure enough they did have a view.
They said, and I quote, “(Our) understanding is they are two separate agreements. First there is the mortgage between the landlord and the lender – if the landlord defaults, they may be subject to possession proceedings, and if the property is taken into possession it will be sold to recover the debt. The second agreement between the landlord and then tenant will be secondary to this. The lender has first charge on the property.”
NO SECURITY
So there we are, straight from the CML’s mouth as it were.
What the CML are saying is that “the tenant turned possible buyer” has no REAL security at all where the owner has a mortgage and defaults.
Maybe I missed something very obvious which means these schemes can work.
I'm assured by a few people in the industry whose opinion I respect that they can work if they are set up right.
I hope so or in about 5 years the press may cotton on to the story that lots of tenants have lost out under lease option contracts that have been set up wrong or unfairly.
I predict that in 8 years time the FSA will end up banning Rent to Buy and Lease Options as they have already effectively banned some of the old practices in Sale And Rent Back.
NO TAKERS
With house prices going up more slowly now I cannot see too many takers for these schemes among the tenant population, right now.
However, I can see the attraction (to the tenant / would be buyer) when house prices are rising fast.
But right now it seems a bit of a stretch to tie yourself to a specific property and a lease option with a private owner (which has no security anyway and which appears to be subordinated to the mortgage) when you can instead just rent and have more freedom and the flexibility to buy a property when and where you want - and when you are ready to do so.
If you are a tenant and you are interested in doing such a deal with a private landlord you should check what happens to your Lease Option to Buy if the landlord were to default on his mortgage.
If you want to find out about the more simple and proven ways to make money in property, please ask us at LettingFocus.com
ABOUT LETTINGFOCUS.COM and DAVID LAWRENSON
We are LettingFocus.com - the landlords’ expert and I’m David Lawrenson, the author of “Successful Property Letting” - the UK’s top selling property and buy to let book for the last 3 years.
I have been a landlord and property investor myself for over 25 years.
At LettingFocus we offer independent unbiased seminars for buy to let investors and landlords as well as one to one advice covering all aspects of being a landlord and investing in property.
Unlike many in the still largely unregulated buy to let and property “advice” business I am not linked to a property company, developer, estate agency or bridging loan provider.
As such I am able to give unbiased independent advice on where to buy (which areas), what type of property to buy, when to buy and how to buy property at a low price. I can also explain how to reduce the risk of getting a bad tenant.
CHECK OUT THESE PAGES AT OUR SITE LETTINGFOCUS.COM:
Our Events only take place twice a year.
For our NEXT SEMINAR AND NETWORKING EVENT for Landlords and Property Investors click here:
Next Property Investing Seminar and Networking Event
We have GREAT OFFERS for landlords too, Click here: Services and Products for Landlords to see our Landlords Resources (Useful Links) page. (Selling services to landlords and property investors and have a national coverage? You could be a partner, please get in touch!)
For general info on our SEMINARS AND CONSULTING click here: Property Seminars, Networking Evenings and Consulting
ONE TO ONE CONSULTING click here: Property Consulting
CLIENT TESTIMONIALS from past customers click here: Testimonials
BUY THE BOOK click here: Buy the Book at Amazon
THE HOME PAGE OF THIS BLOG click here: Blog
THE HOME PAGE OF OUR MAIN SITE click here: LettingFocus Home Page
To JOIN our Free QUARTERLY NEWSLETTER simply send an email to david@LettingFocus.com - Please note we WILL NOT send spam or sell our mailing list to advertisers!
IF YOU HAVE A SITE WHY NOT LINK TO THIS BLOG OR OUR WEBSITE?
Copyright of Blog: David Lawrenson 2009. This blog is updated roughly once a week usually on a Monday or Tuesday.
WANT TO BE KEPT UPDATED WITH OUR LATEST BLOGS?
Over on the right hand side under all the previous blog entries you will find a button which says “Site Feed.” Simply copy the site feed link into your News Reader or News Aggregator.
If you have a website & are thinking of reproducing material here, that’s fine but we DO require a link to the blog to be included, including also all the links in this section. (The full article including all links must be available to ALL VIEWERS of your site and not restricted.)
WANT TO ADD A COMMENT OR VIEW OLD COMMENTS?
To add a comment to this post, simply click on “link to this post” to add your comment and to view comments of other people.
Labels: CML, Council of mortgage lenders, lease option schemes, leases, Let to buy, Property lease option, rent to buy, sale and rent back, SARB
This entry was posted by lettingfocus, on
Monday, November 09, 2009.
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