subject: Using Lease Options To Acquire Uk Property - An Introduction [print this page] Using options to take control of property has only recently become popular in the UK - particularly after the onset of the credit crunch. A lease option is an abbreviated form of the more formal term referred to as a lease with an option to purchase'. In short, a lease option enables the buyer to enter a contractual agreement with the owner of an asset to take its control on the basis of the owner transferring ownership of the asset within a specific time frame for a specific price.
Options are used in various forms across a variety of financial transactions including in the stock market (often referred to as futures). Contrary to what is often stated, lease options have not been exported into the UK from countries like the USA and Australia but have existed for centuries albeit solely within the commercial and land sectors. In land, the lessee (or potential buyer) usually takes an option for a number of reasons such as to ascertain its open market value; to ensure planning permission can properly obtained (and there are no encumbrances) and/or to buy time for the land to be leased. In commercial property, lease options allow corporations to evaluate operations on an ongoing basis prior to locking into long-term contracts (amongst several other uses).
Many see the main disadvantage of lease options being the fact that the buyer does not take ownership of the property which, whilst theoretically true, does not mean that these kinds of transactions should not be taken seriously. Below are some of the benefits of lease options:
- The commonly referred 'below market value' or 'BMV' strategy of aquiring property requires a certain amount of equity to remain in the property to facilitate a purchase. Lease options, on the other hand, enable investors to offer win-win (and sometimes another win' in the case of sandwich options) to vendors with little or no equity;
- Genuine solutions are provided where all parties can eventually gain - the unethical' aspect of buying BMV is removed by the fact that vendors are getting the open market value (OMV) that they want and often more;
- Post credit crunch, many investors found it difficult to obtain mortgage finance due to banking institutions stringent lending criteria. Lease options can enable a potential buyer to take control of another parties mortgage whilst the lending market becomes more accessible;
- Income can be still be earned in the form of positive cash flow from rents (as with any buy to let investment);
- The buyer has the right but not the obligation to purchase. It may, for example, come to a stage where the buyer may not be sure as to whether to take on full ownership of the asset in which case a number of profitable options can still be undertaken;
- More activity in the housing market is always to be encouraged and investment decisions can be made on guided principles as opposed to speculation.
- More activity in the housing market is always to be looked positiviely and investment decisions can be made on guided principles as opposed to speculation.
*** THREE TYPES OF RESIDENTIAL PROPERTY LEASE OPTIONS ***
1) Purchase Lease Option / Short Term Lease Option: the purchaser is granted the option to buy the property at a given date for a given price (usually within a short period, for example to allow the time for a sale to complete). This is used to lock in' a purchase price and is accepted by vendors on the basis that they will know what they will be getting and so that the buyer can proceed comfortably knowing that the sale will occur.
2) Lease Option: the most common form of option used amongst property investors - the best way to explain a lease option' is, in short, when a investor takes control of the property without ownership (although the usual objective is to eventually transfer the deeds into his/her name and reap the rewards of any capital gain). Lease options work very well in a bottoming property market as, firstly, the vendor can remove the ball and chain' of owning a property that they are desperate to shift (and achieve a price that is reasonable for them) and, secondly, the investor to feel sure that he/she will be able to profit from the deal in the future (as well as receive positive rental income).
3) Sandwich Lease Option: originating from the US and Australia where they have been commonly used in residential property for some years, a lease option (as above) is used to control the property with a separate purchase option put in place granted to a tenant buyer. There are essentially two exercise prices: the first, which is set with the owner (at a low value) and the second with the tenant buyer (at a higher value) the investors profit will be both the filling' (the eventual price differential) and rental income from the tenant buyer until the point when the option is exercised.
