What is a Lease Option?
Lease Options’ are used a lot in commercial property matters and are now rapidly becoming a new approach for residential property owners to sell and for individuals to purchase a property in a flexible way, without having to immediately qualify for a conventional mortgage and put down a large deposit.
A Lease Option is a LEGAL agreement, whereby a property owner can grant an Option to a buyer which is an exclusive and irrevocable right to lease and purchase the property within a certain period of time, known as the Option Period, at a price fixed from the outset.
A Lease Option combines the benefits of both a normal rental lease (known as an Assured Shorthold Tenancy Agreement) and an Option to Purchase (known as the Option Agreement). Therefore, in reality, the Lease Option is actually two concepts, using two separate written agreements that combine together as a Lease Option.
We buy properties using a Lease Option from a Landlord/seller and during that time, we either rent the property out and exercise the Option to buy it ourselves at a later date, or sell the Option to someone else, who is typically a first time buyer so they get the chance to buy the property.
Are Lease Options legal?
Yes, Lease Options are perfectly legal and solicitors will still be involved for both sides, just like a traditional property purchase. Not all conveyance solicitors are trained in Lease Options. We can advise you of a few to use.
Who is the Tenant buyer?
A Tenant buyer is the person(s) who will rent the property under the Assured Shorthold Tenancy Agreement (AST) and who has the right to buy the property under an Option Agreement.
Who is the seller?
The property owner or the person granting the Lease Option.
How do I build up a deposit towards the purchase price?
An initial Option fee is paid at the beginning of the Option agreement together with the monthly amount paid every month. These monies are both non-refundable and are credited towards the purchase price. The aim is the Option fee together with the monthly amounts paid over a period of 3-5 years will be at least a minimum of 10% of the purchase price. Once can aim to pay 15% which can improve ones situation when a mortgage is required after the initial 3-5 years.
What other costs are involved in becoming a tenant buyer?
- There are the solicitor’s fees of around £500.00.
- Two months rent will need to be paid in advance on the Assured Shorthold Tenancy Agreement.
- Option Fee of between 3-5% of the agreed purchase price.
- Monthly costs of the rent + option monthly amount
If I have a poor credit rating, will I still be able to apply?
Yes. Whether you have a poor or no credit rating, are new to the UK or going through bad times, you will still be able to apply as long as you can prove income. Bearing in mind that any money that has been invested will be at risk if you don’t keep up payments. You will have time to repair/create your credit report by being a model tenant and paying everything on time. This will prove to a conventional lender of your credit worthiness.
What happens if my circumstances change or I change my mind and don’t want to buy the property?
You are under no obligation to buy the property even though you have signed an Option Agreement. An Option binds the sellers but not the buyer. However, you will lose the initial Option Sum you paid at the beginning of the Option Period together with the additional monthly Option Premiums paid towards your purchase deposit, as they are non-refundable.
When I am ready to buy my property, if I find it has increased in value, do I get to keep the increase?
When I am ready to buy my property, if I find that the property is not worth the purchase price, what then?
If you are ready to buy, the price may be renegotiated or the seller can extend the period of the Lease Option to protect their value.
What if I am ready to buy the house after a year into the 3-year Lease Option?
You are entitled to buy the house any time within your contract period (3 years in this case)
May I make improvements to the property?
Yes. Structural improvements will require written permission. Improvements will add value to the property, thus increasing the value which in turn will increase your investment.
Since you are in the process of buying the property, you will be responsible for all maintenance, repairs and damages that may occur.
If I can’t pay the rent or have missed some rent payments, what happens then?
It is VERY importance that you ensure your monthly rent and monthly Option payment is paid on time. You are under a LEGAL obligation to comply with the terms of your Option Agreement. But also this will show a mortgage lender that you are responsible by keeping up with timely payments and savings towards your deposit. This should also give you a good credit file after a period of time.
The Option to buy can only be exercised provided you are not in breach of your Lease Option Agreement and all payments having been paid and there are no missed rental payments or contractual breaches.
If you are in breach of your contract, you will be required to clear any outstanding money and fix those breaches; otherwise, an eviction notice will be given together with a claim for damages and costs.
If your tenancy agreement has been terminated for any reason, your right to buy will also be terminated and all money invested will be forfeited.
How quickly can I move in?
Once we have done the following:
- Approved your application together with your credit file.
- Solicitors have prepared the Lease Option Agreement and you have signed a copy.
- All money has been paid that has been agreed.
The process can take around 4 weeks. This process can be quicker in some cases.