Rent to Buy and Property Lease Options
Our brief comment in past blogs on the topic of property lease options (or Rent to Buy) schemes which were quoted in last weekends’ “Financial Times” Money section have been taken up by a number of other websites.
In some cases they have used some of the article in the FT and reproduced it without quoting us properly.
Just to clarify, in the FT we said just this, ” The danger (with these schemes) is that the tenant turned possible buyer has no real security at all over the property.”
This lack of real security is our concern.
In our view, some types of property lease options and rent to buy schemes in the private market may be dangerous for would-be first time buyers, who as tenants, pay a premium for a lease option (on top of the rent under their tenancy agreement) to a landlord to give themselves an option to buy the property from the same landlord at some future date or dates.
It seems to us that the majority of the risk is usually on the tenant’s side, because in the event the landlord defaults on his mortgage, the lender (if there is one) will ultimately recover the property and the lease option would have to take second place. In this scenario, there is a real likelihood that the tenant’s lease premium would expire worthless and they would find themselves homeless at worst, or, at best, having to pay rent to the mortgage lender (who would normally ultimately seek repossession anyway.)
Also, in some versions we have seen, if the tenant misses just one payment under the lease option, the lease option could expire too.
We feel that much tighter controls should be in place to make would-be first time buyers aware of the risks and would strongly urge property buyers to take INDEPENDENT legal advice before entering into such arrangements.
We would hope the FSA, Citizens Advice Bureau and the Council of Mortgage Lenders were aware of how such deals can be used too – but I doubt they are currently.
Of course, these schemes are attractive to some property investors as it potentially gives them an additional income stream (from the lease option) and may be very especially attractive when used in connection with what are called “sandwich lease option” deals.
However, whilst they are usually good for investors and landlords, we worry about the risks some tenant-buyers are taking on with these schemes which can, in the worst cases, prove worthless for them.
Other types of property lease options may be more ethical and fair and if the lease option is worded fairly even the types we are concerned about may be OK too (though we and the Council Of Mortgage Lenders cannot see a way around the repossession problem should the landlords default on the mortgage and the lender repossesses.)
We have nothing against property lease options. In some cases they may present good solutions to property buyers and investors.
But we would hope all property investors look to get involved in schemes like these only if the schemes are fair and transparent and if the risks to the other party have been clearly explained.
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