Lease Options
The property ladder seems to have had the bottom couple of rungs knocked out by a combination of high property prices, high mortgage arrangement fees, stamp duty that affects virtually every habitable property in the South East and rising interest rates. A replacement rung, in the form of a lease option, is now available that might just help first time buyers to get a ownership of their first property.
The concept of the option is well-known in the financial world, and can be applied to shares, land or property. Having an option gives the holder the right to buy or sell something at an agreed price after an agreed period. The holder usually pays a premium to be granted this right, but is not obliged to exercise it.
Lease options on property are already popular in the US and other overseas markets. New UK companies such 1stLOCation, run by The Lease Option Company are now offering them up in a bid to attract both hard-up buyers and landlords in search of reliable tenants.
So how does it work? A lease option agreement involves a tenant being given the right to buy his property at an agreed price at the end of a given rental period, usually three to six years. The tenancy agreement is fairly standard except that it puts repairing obligations onto the tenant, just as they would have as an owner.
Agreeing a price in advance makes it easier for buyers to plan financially and save for a full deposit. A longer lease and the prospect of ownership provide security and reduce the amount of ‘dead’ rent money going down the drain. The tenants will still need to persuade a mortgage lender to provide finance in the normal way.
Another bonus for the renter-buyer is avoiding the nasty business of buying property on the open market. A deal agreed in advance, on a property you’re already occupying means no complicated chains or moving costs.
Lease options don’t just have to be for first-time-buyers. They can provide a place to live at a guaranteed price and time to sell your existing property. This is useful if your property is slow to sell but you need to relocate quickly.
The option is a great deal for tenants as it fixes the purchase price and therefore prevents a general rise in property valuations pricing them out of the market. Of course, if prices drop, affordability will have improved and the tenants can put in a lower offer on their property, or on another better one.
Lease option agreements can appeal to sellers too. The allow some extra income to be gained in return for forgoing the upside on property prices: so they would be ideal for property investors who have a neutral view of the market in the next three to six years.
Unreliable tenants who don’t care for a property are a landlord’s worst nightmare. Think wine-stained carpets, blocked sinks and car tyres in the garden. Those on longer leases in properties they’re looking to own are unlikely to fall into this category. Longer rental periods also allow landlords to avoid costly gaps between tenancies when a property lies empty.
The lease option offers some protection against the value of a property going down. However, the seller has the inverse risk to the buyer. If house prices rocket during the rental period then a property could end up being sold for much less than it could make on the open market.
As with any property purchase, a lease option carries some risk for buyers and sellers alike. But with perks on both side of the deal, this new form of tenancy could prove a refreshing alternative to traditional property agreements in the UK.
