Lease Options Explained
by Simon Zutshi
Lease Options are probably one of the most powerful, and yet misunderstood, and underutilised tools available to property investors.
With a Lease Option, you can control a property that you don't own. This means you can benefit from monthly cash flow and equity growth from the property, without the need for a mortgage, or a large 25% deposit. There's also no stamp duty payable until you exercise the option - if you do indeed exercise the option, because you have the choice whether to buy, or not.
In this article, I want to give you a quick heads up on exactly what are Lease Options - how can you profit from them, why an owner would grant you an option in the first place, and how you can find them.
Why Most Investors Don’t Use Them
There are a number reasons why the vast majority investors don't use Lease Options.
First of all, most property investors are completely unaware of Lease Options.They're not even on their radar. Then there are investors who know about Lease Options, but don't really understand them and how to use them. There's also a group of people who are aware of the power of using Lease Options, but don't really understand when they are an appropriate tool, and so try to use them in a situation where they don't really work and then wonder why they fail to get results.
What is a Lease Option?
Otherwise known as a Purchase Lease Option, or a PLO, this is where you find someone who owns a property that they don't want anymore. They want to sell it to get rid of the hassle, responsibility and liability.
You enter into a legal contract with the owner, where you have the right, but not the obligation, to purchase the property within a certain time period for a fixed price. During this period, you have exclusive rights over the property, so the owner cannot sell to anyone else. However, we always want to make sure the option agreement is assignable. If we don't want to buy the property we can assign it on to someone else at a profit.
How Lease Options Create Profit
During the term of the Lease Option, you pay a monthly fee to the owner, and then you can use the property. The idea being you can rent the property out to tenants for more than you pay the owner, which gives you a positive monthly cash flow. If the value of the property goes up during the option period, you could also benefit from the capital growth because you only pay the original fixed option price to acquire the property, even if it's worth substantially more at the time you come to complete.
Now one of the questions that could stop you from using this powerful tool is: “Why on earth would an owner agree to this? “
This is a great question, and it's vital you understand the answer.
Remember, we're looking for motivated sellers, people who really don't want to own this property anymore.
Maybe they are a tired, retiring, or remote landlord, who for whatever reason does not want the hassle of managing this property, so they want to sell it. In the current buyer’s market, it's not very easy for landlords to sell their property at the price they would like to achieve.
Most investors, when we buy property, we like to buy at a discount to get some instant equity on the day we buy. However, with the Lease Option, we can actually offer the owner the full market value today, which is more than any other buyer will offer them, if they are prepared to wait to receive the money.
When Lease Options Work Best
The most important point with Lease Options, is that this only works when the owner does not need the money from the sale now. Unfortunately, most people selling property, are doing so because they want to access the equity, in which case they will not be prepared to wait three to five years to get their money, and so a lease option would not work for them. However, not all sellers do need the money from the sale. What's more important is for them to get rid of the hassle now and achieve the most they can for the property.
Many landlords who are selling up their property portfolios will often just put their money in the bank, where we know they are not getting a great return on that money. So as well as giving the landlord a higher price than they would receive if they sold in a traditional way, we continue to pay a monthly fee to the owner.
If the owner was to sell this property, of course, they would lose the income stream. However, in this way, they also make a small profit each month, which over a number of years, if you add it to the full market price we're paying, it means we are paying the owner far more than anyone else is prepared to pay for that property.
In case you're thinking: “Why would I want to pay more for a property than other people?”. Well, the monthly option fee comes out of the rental income on a property that you don’t own, so you not really paying for it.
Lease Options vs. Rent-to-Rent
Each month you pay the owner a few which is less than the market rent, because they have no hassle or responsibility anymore, and you still make a margin every month on a property that you don't own. This is similar to the concept of Rent-to-Rent. However, with Rent-to-Rent, you give the property back to landlord after three to five years. A huge advantage of Lease Options, is you also benefit from the capital growth over the option period. Even though you agree to pay the full market price today, that could well be equivalent to a discounted price in the future, if the value of property goes up during the option term.
Many of my students have been able to use this equity growth as the deposit to eventually buy the property. This means they've not had to put a big deposit in when they come to buy, and they've also made rental income throughout the length of the option period.
How to Find Lease Option Opportunities
Right now, there are tens of thousands of landlords who are selling up their properties that could be perfect for Lease Options, because maybe they don't actually need the money now they just don't want the property.
There are lots of ways to find these, but one is to do an online search for properties that are listed, both for sale and also for rent. There are about 5,000 of these all over the UK right now. This is where the owner is saying they want to sell the property, but if they can't sell it, they'll be happy to rent in the meantime, and that's exactly what we're doing. We're renting now and then buying in the future, if you want to.
What happens at the end of the option period?
There are four potential exits.
#1 You purchase the property as agreed, in which case you'll need to get a mortgage, and may, or may not, need a deposit, depending on potential equity growth in the property.
#2 You could assign the option to another buyer, for which you could earn a fee.
#3 If the value has not gone up, you could always renegotiate with the owner an extension of the option term. They're not obliged to grant this, however, given they want to get rid of the property, they might well do so for another small upfront option fee and maybe a bit more monthly income.
#4 You walk away. Remember you have the right or not the obligation to buy this property. From an ethical point of view, if you enter into an option, I believe you should always intend to buy the property, however, you are not obliged to do so. It's very important, if you do give the property back to the owner, you give it back to them in the same as or better condition than when they granted the option to you. There have been some horror stories where people have not looked after the property and given it back to the owner in a poor state, which, personally, I think is unethical.
Using Lease Options for Your Own Home
So far, we’ve talked about you acquiring a property which you rent out to make a monthly profit. However, many people use options, including myself, to upgrade where they live. Instead of renting the property out, you can move into the property yourself. This is a great way for you to “Try before you buy” to make sure you really like living in the property.
I've done this several times, and currently, the property I live in, I don't own. I have a Lease Option on it, and I fully intend to buy this property, because I know my wife and I are very happy here.
So who do you know who might want to upgrade where they live? Move to a bigger house and, or a better area? The monthly fee you pay to the owner might be less than the market rent, and less than a mortgage would cost you.
Maybe you have some family and friends who are currently renting and not a home owner yet. Using a Purchase Lease Option is a great way to get their foot on the property ladder without having to put in a big deposit now, or get a mortgage.
Final Thoughts
I hope this has given you an understanding of Lease Options so you realise how powerful they can be, as part of your property investing toolkit.
In this current buyer’s market, it's a perfect time to be using Lease Options, especially with all the retiring landlords, many of whom don't want their property anymore, but don't actually need the money from the sale.
That’s why this year, at my annual Property Magic Live three-day event on the 12th to 14th September, one of the main topics we'll be covering is how you can use Lease Options with your property investing.
You can check out the event at or scan the QR code.
Also my new book Lease Options Magic is now available and I have a special offer if you buy it direct from me during the launch period. Full details here or scan the QR code.
Invest with knowledge, Invest with skill
Best wishes,
Simon Zutshi
Author of Property Magic
Foudner property investors network
Founder Property Mastermind
