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Lease Option Agreements – A Creative Residential Property Sales Strategy

December 13, 2021

Selling residential property with a view to fast, regular volume turnover is the most commonly understood strategy for property investment.  Beginner investors often think in terms of buying a low market value property for renovation.  After refurbishment such properties can then be sold at a decent profit and relatively low risk.  This potentially fast turnaround on profit is the attraction of investment in residential properties.  Another well-known strategy for landlords is to buy to let, allowing for on-going, regular returns on investment.

 

What Is a Lease Option?

Whichever property investment strategy you choose, there will be associated risks and benefits.  One less understood property sales strategy is a lease option, which achieves a balance between these two previous options.  To understand this type of arrangement, it helps to separate the two concepts, such that the ‘lease’ concerns the agreed monthly payment to the owner and the terms of which allow the lessee to manage that property as if it were their own, including renting it out to tenants for a profit.  The ‘option’ is about the choice to buy that property later; a price is agreed ahead of time between both parties; this may be subject to review also, making it important to get legal advice when establishing an agreement.

 

What Are the Benefits of a Lease Option Agreement?

For property owners, these legal agreements enable a regular, predictable residual income, with an option to sell to the lessee later.  This reduces tenant turnover risk.  For the lessee, it allows them to control that property and even generate income from it, with the right to buy it later.  There is no obligation to buy or sell, however.

Lease option agreements allow a degree of certainty for both the lessee and lessor, beneficial to each party.  For the lease period, the lessor can expect a regular income from the lessee for leasing their property.

For the lessee’s part, they too have some reassurance of being able to occupy a property for a given time, during which they will be paying the equivalent of a rent, but those payments may even become part payment towards the value of the property if the intention is to buy it further down the line.

 

Negotiable Terms Of Lease Options

 

There are four key elements to this form of property management, specifically:

  1. Amount of monthly payment
  2. The future purchase price (although buying is possible during the term of the lease too)
  3. Amount of upfront payment given in exchange for the option (legally termed the ‘consideration’)
  4. The duration of the agreement; if the lessee decides not to buy, they hand back the control of the property to the lessor.

 

With terms and conditions negotiated up front, these transactions provide for greater flexibility than traditional rentals, with the reassurance that rather than ‘throwing away’ money on rent, each payment could contribute towards the eventual purchase of the property and reduce the ultimate price, if agreeable to both parties.

This works well when would-be home owners who cannot afford an up-front mortgage deposit for properties in more expensive locations, because the upfront payment may be as little as £1.00. Whereas there may be a larger deposit demanded, the terms of any agreement can be negotiated such that they work for both sides of the transaction.

Lease option agreements are more often associated with commercial than residential properties, such as for shops, warehouses and offices.  Nevertheless, for would-be home owners, property lease options are a welcome creative home ownership strategy.  It also offers the buyer some protection against future price rises, given the selling price is settled at the time of the lease.

However, this also poses some challenges for the property owner, who in fixing the price of the property during negotiations on the agreement, may be leaving themselves open to potential losses if the value of their property goes up.  Nevertheless, with good legal and accountancy support, these risks can be mitigated by pricing in future price rises.  Similarly, lease arrangements can last for five, ten or more years and be renegotiated at such review periods in order to bring terms into line with changes in market conditions.

Lease option arrangements are therefore and more creative and potentially valuable alternative property investment strategy allowing for more flexibility and reassurance for buyers and sellers alike.

If this property sales strategy appeals to you, please get in touch with Roperty’s team of expert consultants to find out more about how you too can benefit from a lesser understood, but increasingly popular approach to selling property.

 

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