A purchase lease option is a legal agreement allowing investors to not only control a property but also generate income from it with the right to buy the property at a later time. With any purchase lease option, the monthly payment, upfront payment, purchase price and the length of agreement will need to be decided.
The monthly payment is typically what the owner needs to cover the mortgage on the property and any other relevant costs. For a purchase lease option to be legally binding, a financial consideration needs to be paid to the vendor in return for the option to buy. The fee can be as low as £1, but it can be much higher depending on the deal.
The property purchase price that you have the option to buy for in the future needs to be agreed, along with the agreement length after which you give the property back if you haven’t bought the property.
How to find property owners interested in purchase lease options
Purchase lease options are often used for undervalued properties, properties for sale with no or negative equity, or when investors or landlords wish to gamble on a quick change in the value of a property. It also only works with vendors who don’t need the money from selling the property now.
To find vendors who are motivated sellers and could potentially be interested in purchase lease options, look for someone with a property listed with both a letting agent and estate agent at the same time. This typically means the owner wants to sell but is struggling to and also shows they are open to renting the property until they can sell it.
A retiring or tired landlord who no longer wants their buy-to-let property can be another type of motivated seller that would work well with purchase lease options. You can potentially find these landlords through online letting agencies and platforms or through your property professional network.
Make it a win-win strategy for you and the owner
With purchase lease options, it’s important to make this a win-win opportunity for both the owner and investor, otherwise it’s not an ethical investment strategy. Through purchase lease options, property investors might be able to pay owners more for their property than if they sold it right now.
The owners can also earn a monthly option fee from the investor. Additionally, the monthly option fee and the purchase price can add up to more than if the seller sold the property today and put the money in the bank.
With a purchase lease option, the investor will take care of the property, any maintenance that is required and will even pay to insure it, removing the hassle from the owner. It’s important the seller does not feel cheated from a purchase lease option and that the investor goes about the strategy in an ethical way and is transparent about their investment strategy and structure.
Benefits of purchase lease options
Purchase lease options can help investors expand and diversify their portfolio. A purchase lease option gives you the right to buy, but you’re not obligated to. However, with this type of agreement, the owner must sell the property to you if you exercise your option to buy.
Purchase lease options allow property investors to expand their property portfolio without needing expensive finance. The consideration is often much less than what you typically need for a deposit on a mortgage and has the potential to make you a monthly income as if you own the property.
Financially, this is a less risky property investment strategy for investors. If the property value increases more than the purchase price you’ve agreed, then you can purchase the property and have instant equity. If the property value ends up being lower than the agreed price, you can hand the property back and not execute the option.
Successful purchase lease options
The success of purchase lease options is dependent on finding a potential seller who is open to this kind of arrangement. And a truly successful purchase lease option provides a win-win opportunity for both the investor and owner.
Solicitors are extremely helpful with these types of investments as their legal expertise is necessary in developing option agreements, which are complex legal documents.
If you’re interested in using purchase lease options as a property investment strategy, PropertyMenu can put you in touch with trusted solicitors who can help you develop an option agreement. Please contact us if you need any tips or recommendations for purchase lease options.