A lease option agreement is a type of legal contract used by property investors in certain circumstances to help them acquire properties.
Given that this is the property investing section of MoneyBlog, let’s assume you are either a property investor or an aspiring property investor.
You’ve found a house for sale that you want to buy. The problem is it’s on the market for £200,000 but your calculations tell you that it’s current market value is only £160,000. As you talk to the owner it transpires that the reason it’s for sale for £200,000 is because that’s how much they need to pay off the mortgage on the property. The owner is in negative equity.
Clearly, as an investor, you cannot pay more than the property is worth. But you still want to buy the house and the seller wants nothing more than to get rid of it. They don’t want to be paying that mortgage any more.
Enter the Lease Option Agreement. It works like this:
You make an offer of £200,000 to the owner. You’ll give them the £200,000 they want. However, you can’t give it to them now because the house isn’t worth that much now. You’ll give it to them in ten years (or however long you decide the market needs to recover). But in the meantime, you will take control of the house and you will pay the mortgage.
It will be as if it was your house, except that technically it still belongs to the owner.
At the end of the 10 year period (or however long you decided it should be), you then have the option to buy the property. Note: you have the OPTION. You could decide not to. The seller has no option. They signed to say they’d sell to you. They cannot back out.
You (the investor) win because you get a property without putting any real money down.
The seller wins because they get out from under the crippling mortgage.
How To Execute A Lease Option Agreement
Lease option agreements must go through a solicitor. The solicitor acts as a neutral third party to explain to the seller what it is they are agreeing to.
If you do not go through a solicitor, there’s a chance that the agreement won’t stand up in court should it need to. (If you as the investor are the only person who explained the lease option agreement to the seller i. you are not a legal expert and ii. you have a vested interest in them signing it; so the seller can always argue that they didn’t know what they were signing. The judge will side with them.
Are YOU a solicitor offering lease option agreements? Buy this space. We’ll link to you!