Wednesday, December 16, 2009

Lease Options - What Are They?

Lease Options are a dynamite strategy to explode your monthly cash flow from your property investing. However there is a mystique surrounding them. In this article we look at lease options and showing you how this unique transaction is put together.

With the ever increasing rises in house prices 'Lease Options' are rapidly becoming a new approach for individuals and families to purchase their dream homes to live in and provide investors like you with an alternative property investment strategy other than the mundane 'buy to let'.

Did you know today that over 1 in 4 people are being refused normal mortgages at affordable rates? That divorce rates are on the rise amd more people are living alone? And that most people today are unable to raise even a 5% deposit on a house, let alone a 10% deposit. All these people need somewhere to live and this is where YOU and the Lease Option can provide a flexible and proven way for people to own their dream homes.

As the name suggests a lease option combines the benefits of both a normal lease (an AST) and an option to purchase (more of about this sensational strategy later in this series). You, as the investor will own a property and then let it out to your proposed purchaser (I will call him 'the tenant') with the view that in a set period of time the tenant will then have the option to purchase the property at a pre agreed price.

In reality the Lease Option is two separate agreements; an AST lease and an option agreement. You will need to make sure that your solicitor gets these absolutely right as it is these legal agreements which make this strategy work. Below I set out for you briefly each component.


The lease to be used is simply an AST with a few minor changes as I discuss below. You will own the property throughout the period of the tenancy and the tenant will only have normal tenant rights. Given that it is the ultimate intention that the tenant will purchase the property, he should be allowed to to treat the property like 'home'. He can decorate and perhaps materially refurbish the property, all with your prior consent of course. Also the tenant will be expected to put and keep the property in a good state of repair as it is intended that it will be his home.

The Option

The option grants the tenant the RIGHT but not the OBLIGATION to purchase the property from you within a set time period at a set price. Remember that the tenant does not HAVE to purchase the property within the agreed time period (eg two years); he just has the RIGHT to purchase the property. If however the tenant chooses to exercise his option then, subject to the tenant complying with all the terms of the lease option agreement the investor must sell the property at the agreed price.

When both these concepts are combined you have your lease option. Typically I would expect the property you will sale will have been purchased at an undervalue. The purchase price set out in the option will be the market value of what the property is worth today or maybe at a small premium. Of course as owner of the property you can set what ever price you would like for the purchase price. The rent you will charge will be at a premium to reflect the fact that you will be selling the house in, say 2012 at 2009 prices. Also you are a business and you need to explain to your purchaser that you are providing them with a fantastic service and are therefore entitled to make some money.

Most Lease Option Agreements will provide for an Option Sum to be paid on signing of the Lease Option Agreement. This would be like a small deposit of perhaps 1-2% of the Purchase Price which is usually not refundable. I shall leave it up to you whether you would like to deduct this Option Sum from the monies due to you sell the property to the tenant.

Benefits to the tenant are that they will be able to purchase their 'dream home' which they might not be able to afford now and still look upon the property as their 'own' home.

Benefits for you are that you will lock in the profit on your property, you will receive excellent cash flow during the tenancy period as you will be charging premium rent, and the whole strategy will run on 'auto pilot as the new 'owners' take care of the house and make all the payments because as far as they are concerned they are the owners!

Remember, most people think cash is wealth. It isn't. Real wealth is cash flow (money coming in passively month after month) and there are few better strategies than this to help explode your cashflow.

To learn more about this strategy visit now.

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I thank for the comment!