"lease option" and "rent to buy"?

StMilMo

Hi. I am selling a BTL, typical student rental place, and have been approached by someone proposing the following. I have not heard of these options before and am a little wary about how they would pan out or why I might favour it over a straight-forward sell. Can anyone explain what the catch is or whether they are a good idea?

Thanks,

LEASE OPTION (rent with option to buy): 

You would agree the price now which would be locked in on the contract.

The price and term is up to you.
So lets say as an example the price of a property was £500,000 and the term was 120 months. 

The buyer can exercise their option to buy the property at any time within the term £500,000. So even if the value was to increase to say £520,000 then they could still buy the property for the £500,000. 

During the term the buyer would lease the property from you and pay you a fixed monthly amount which you would set from the get go. The monthly payments that they make to you does not reduce the balance of £500,000. 

The buyer takes on all costs associated with the property during the term such as insurance, maintenance, management, repairs, property taxes etc. 

If the buyer stops paying during the term then you can cancel the agreement and the property is still yours. 

RENT TO BUY (INSTALMENT PROGRAM): 

You would agree the price now which would be locked in on the contract.

The price and term is up to you.

So if you said as an example the price of a property was £500,000 and the term was 180 months, then the buyer would be paying the you £2,777 per month to clear off the balance.

These types of contracts are often referred to as ‘lease purchase’ or ‘rent to buy’ meaning that the monthly ‘lease’ or ‘rent’ payments that the buyer pays you are reduced from the balance. The buyer can exercise their option to clear the balance sooner rather than having to wait the whole length of the term. This means that they would be able to obtain the deeds sooner. 

WHY:

As all of our clients are property investors they like buying in these ways because it lets them add additional properties onto their portfolio without having to throw all of the money at it in one go. They know exactly how much they are paying each month and are not subject to interest rate fluctuations. They do not have to rely on bank finance this way. Generally they will have a strategy to clear the balance off earlier, as they do not get the deeds until they have paid you the full balance. So the ownership remains in your name until they have cleared the balance. 

The benefit to you the seller is that you have a property investor who is committed to buying the property from you at above market price in a declining market, you are not having to sell below market value and you are getting money coming in immediately rather than waiting for the property selling on the market as the value decreases. So you have an immediate cash flow that you would not of had otherwise. 

During the term on both scenarios the buyer would take on all costs associated with the property such as management, maintenance, property taxes, service charges, insurance etc. 

The buyer pays our fees and also the legal fees, so you have no outlay. 

If the buyer was to default continuously on the payments then you could make the contract null and void and not have to pay them the money back.

davidmcn

They are not "committed to buying the property from you" at all though, it's an option i.e. their option to buy or not - you are committed to selling the property at a price which may not be a great one by the end of the option period. And for as long as the option runs, you're not able to do anything else with the property.

You're entering into a non-standard form of lease which is almost certainly prohibited by your mortgage lender (indeed the whole arrangement would be anyway).

You're losing control of the property so the middleman could pocket all the rent and walk away leaving you with the place having been trashed.

As with any tenant, it's not as simple as "making the contract null and void", it would probably take months to evict whoever has been put in the property.

In short, avoid.

AdrianC

So basically, they're both them renting from you, with a unilateral option to quit with no notice. They simply stop paying. And the tenants...?

Option 1 - they pay you an undisclosed amount of rent for ten years, then can decide whether to buy from you for today's value. I think we can all guess how that's going to fall. Prices rose? Buy. Prices fell? Don't buy.

Option 2 - they buy it from you, but also borrow the purchase price from you over 15yrs at 0% interest.

Heads they win, tails you lose.

eddddy

The problem with these types of schemes are that they are generally run by 'shady' companies with no assets and no track record. They just want to make some 'big bucks' quickly.

An obvious ploy is that they get you to agree a cheap rent for a few years - because they're eventually going to buy from you at a good price... Except that that they 'change their minds' and never actually buy.

And maybe they fail to insure the property - and it burns down. Or their tenants wreck the property. Or the tenants refuse to leave, so you have to evict them, etc etc.

SDLT_Geek

StMilMo said:

Hi. I am selling a BTL, typical student rental place, and have been approached by someone proposing the following. I have not heard of these options before and am a little wary about how they would pan out or why I might favour it over a straight-forward sell. Can anyone explain what the catch is or whether they are a good idea?

Thanks,

LEASE OPTION (rent with option to buy): 

You would agree the price now which would be locked in on the contract.

The price and term is up to you.
So lets say as an example the price of a property was £500,000 and the term was 120 months. 

The buyer can exercise their option to buy the property at any time within the term £500,000. So even if the value was to increase to say £520,000 then they could still buy the property for the £500,000. 

During the term the buyer would lease the property from you and pay you a fixed monthly amount which you would set from the get go. The monthly payments that they make to you does not reduce the balance of £500,000. 

The buyer takes on all costs associated with the property during the term such as insurance, maintenance, management, repairs, property taxes etc. 

If the buyer stops paying during the term then you can cancel the agreement and the property is still yours. 

RENT TO BUY (INSTALMENT PROGRAM): 

You would agree the price now which would be locked in on the contract.

The price and term is up to you.

So if you said as an example the price of a property was £500,000 and the term was 180 months, then the buyer would be paying the you £2,777 per month to clear off the balance.

These types of contracts are often referred to as ‘lease purchase’ or ‘rent to buy’ meaning that the monthly ‘lease’ or ‘rent’ payments that the buyer pays you are reduced from the balance. The buyer can exercise their option to clear the balance sooner rather than having to wait the whole length of the term. This means that they would be able to obtain the deeds sooner. 

WHY:

As all of our clients are property investors they like buying in these ways because it lets them add additional properties onto their portfolio without having to throw all of the money at it in one go. They know exactly how much they are paying each month and are not subject to interest rate fluctuations. They do not have to rely on bank finance this way. Generally they will have a strategy to clear the balance off earlier, as they do not get the deeds until they have paid you the full balance. So the ownership remains in your name until they have cleared the balance. 

The benefit to you the seller is that you have a property investor who is committed to buying the property from you at above market price in a declining market, you are not having to sell below market value and you are getting money coming in immediately rather than waiting for the property selling on the market as the value decreases. So you have an immediate cash flow that you would not of had otherwise. 

During the term on both scenarios the buyer would take on all costs associated with the property such as management, maintenance, property taxes, service charges, insurance etc. 

The buyer pays our fees and also the legal fees, so you have no outlay. 

If the buyer was to default continuously on the payments then you could make the contract null and void and not have to pay them the money back.

There is a similar post here: https://forums.moneysavingexpert.com/discussion/6212308/deleted#latest  (though OP chose later to delete the original posting).

AdrianC

It's a scam. It's always a scam.

If they want to buy the property, they pay you the agreed price now. Financing that purchase price is their problem. You are not their lender.