Frequently Asked Questions About Lease Options

A Lease Option, Purchase Lease Option (PLO), is a powerful tool that you can use to control an asset which you don’t own. You enter into a contract with the owner of the asset, whereby you have the right to buy that asset (but not the obligation to buy) within a certain time period (Option Period) for a price that you set today (Option Price). There should be an Upfront Option Fee, usually £1, but it could be several thousand pounds. This Upfront Option Fee comes off theOption Price when (and if) you do actually purchase.

There is also a Monthly Option Fee which you pay to the owner in exchange for being able to use the asset. This monthly option fee may or may not come off the end price. It all depends on what you agree with the owner.

Finally, a Lease Option should be assignable so that if you don’t want to exercise your right to buy, you can assign this benefit to another person or company and potentially make an additional profit.

There are many benefits of using Lease Options where possible:

The first benefit for you with a Lease Option, is that you get to try before you buy. You can rent the property out. Make sure you're happy with it before you actually commit to the full purchase. This makes investing in property less risky, because you can avoid buying properties that might be a mistake.

The second benefit is that you don't need to put down a large 25% deposit in order to start using the property.The investment to acquire a Lease Option could be as little as £1000 pounds (to cover the legal costs). However, typically, a Lease Option might require between £5k and £10k to cover all of the costs. This can be finance as a NO Money down deal. More on this later.

The next huge benefit is that you do not need to get a mortgage until you actually buy the property (if you do decide to buy it). This is great if you can’t get mortgages or have too many mortgages already.

This leads on to the final benefit, which is that you could be making money from a Lease Option property very quickly. Typically, legal work might take three or four weeks, which is much quicker than an actual purchase of a property, which will probably take more like four months in the current market conditions.

Yes, absolutely. Once you understand how to use Lease Options correctly, they are a very powerful tool which will help you quickly build up a cash generating property portfolio. If I lost everything and had to start my property journey from scratch, knowing what I know now, Lease Options is absolutely where I would start. However, you do need to learn how to use them correctly.

Yes, as an experienced investor with 28 years of property investing experience. I love Lease Options, because I can quickly control a property using very little of my own money,and without having to get a mortgage. Lease Options are versatile tools which can be used in conjunction with any property investing strategy, particularly those that might be favoured by more experienced property investors such as: Short Term Rentals, Houses of Multiple Occupation,  Commercial to Residential conversion, Freehold Leasehold Title splits, etc. It's amazing how many, even experienced investors, don't really understand Lease Options otherwise they would have done at least one by now.

Unfortunately not. This is a big mistake made be many investors when trying to use Lease Options. They try and use then when it’s not appropriate, then they think that options don’t work. Lease Options can work in conjunction with every property investing strategy, in certain circumstances. There are two requirements we need to look for to determine if a Lease Option is an appropriate solution, or not.

The first requirement is the seller doesn't need the money now from the sale of the property. Most sellers are selling because they want to access the equity in that property, therefore in most situations a Lease Option is probably not going to work. However, in a situation where a seller wants to get rid of a property, but they don't really need the equity now or maybe there is no equity, then a Lease Option could work as long as the second requirement is met, which is favourable mortgage conditions.

Favourable mortgage conditions means if we're taking on someone else's property, either there's no mortgage (about 25% of properties have no mortgage) or if there is a mortgage, ideally it is already; a buy to let mortgage; on a low interest rate;  with a long period still to run.

If both of these criteria are met, i.e. the seller doesn't need the money now, and there are favourable mortgage conditions, a Lease Option could be a great solution for the seller.

Although you don't require a 25% deposit, there is normally some money required to acquire a Lease Option. The minimum might be £1000, but typically a Lease Option with all the costs might be somewhere between £5k to £10k. These costs could include: fee to a sourcing agents, fee to an estate agent, the legal costs for you (and potentially the seller), light refurb costs on the property, new furniture etc.

However, there are commercial lenders who will lend to property businesses on an unsecured basis, to cover all of these costs. This means, if you have a property company, and the deal is good enough, you can actually borrow all of the money to do a Lease Option. You can pay this loan back (plus interest) from the property monthly cash flow, over a three year period, which means Lease Options, in the right circumstances can be done with no money your pocket, a true no money down method.

Rent to Rent (R2R) is very similar to Lease Options, in that you find someone who's got a property they don't really want. You take on full responsibility for the property. You pay a guaranteed rent to the landlord each month. You then rent the property out in a more profitable way than the owner and make a margin on the difference between what you pay the owner and the higher amount you charge the tenants. This is exactly what you do with a Lease Option but with Rent to Rent, you don't have the right to buy the property. That means you don't benefit from any potential capital growth. At the end of the Rent to Rent term, you give the property back to the owner, who might agree to an extension of the contract, for a few more years, but ultimately the owner gets their property back at some point. With a Lease Option, remember you have the right to buy the property (if you want to) and so you can benefit from potential value increase over the Option Period.

For this reason, on a Rent to Rent deal, we want to aim for a 100% return on investment. That means any initial capital that's put into the property, we get back in rental income within the first year. With a Lease Option, because we have the right to buy the property in the future (if we want) we are prepared to put more money into that property and might be happy with just a 50% Return on Investment, i.e any money we've had to put in to acquire the option should come back within a two year period. This means we might be able to do some deals that would not really work as Rent to Rent but might work as a Lease Option because we're happy with a lower return on investment. 50% is still very good.

At the end of the option period there are 4 possible outcomes:

The first outcome is you exercise your right to purchase the property as planned, at the agreed Option Price, less any Initial Upfront Option Fee. This must be done before the end of the Option Period, otherwise you lose the right to buy. 

The second outcome, is you assign the property onto someone else who ends up purchasing the property. You can make a profit here if the price you assign to the end buyer is higher than the Option Price agreed with the owner.

Third outcome, is you re-negotiate with the owner. The owner is not obliged to extend but if you've been looking after the property and they really don't want it back and you're unable to purchase at that time, then they might agree to extend the contract. As part of the negotiation you might agree to pay another Upfront Option Fee and/or you might pay a higher monthly Option Fee, but this is all negotiable.

And finally, you could walk away from the deal. Remember you have the right to buy, but not the obligation to do so. From an ethical point of view, if you enter into a Lease Option agreement, I believe you should have the intention to buy the property but, of course, circumstances can change over time. If you do hand a property back to the owner, you should make sure that it is in as good as or better than the condition when you first took it on. 

One of the benefits of a Lease Option for the property owner, is that you take on the full responsibility for looking after their property.You look after all the maintenance, the bills and maybe even pay for the insurance. Personally, I would get the owner to take out the insurance policy, to make sure it's fully adequate, however you might offer to pay for this as part of the deal.

This is a very important question. Many property investors just can't get their head around why on earth an owner would enter into a Lease Option agreement. If you don't understand this, you probably won't be able to secure any Lease Options. If you can't see the benefits the owner, it's going to be very difficult for you to get the owner to agree. However, you need to put yourself in the shoes of that property owner. Usually they really don't want the property anymore. They don't want the hassle. They don't want the responsibility so you're coming in to solve a problem for them. What is someone else's lead weight around their neck could be gold when you take it over and use the property in a different way. For example, someone might be renting out their property as a single let property, which just doesn't stack up with the current higher interest rates. However, it might be possible to repurpose that property for a different use, such as Short Term Rentals, or as a House of Multiple Occupation (HMO) where the income is significantly higher than a Buy to Let. This means so you can actually pay that owner the full market rent for a single let, but use it in a different way and so make a profit. It's all about understanding what is the problem for the owner. 

Remember, if someone's trying to sell a property because they want the equity now, a Lease Option is not going to work. However, if they don't need their money now, but want to get away from the hassle and responsible of the property, then a Lease Option could be a perfect solution. A win win for everyone involved.

There are more and more landlords looking to dispose of their properties than ever before.

This is because of increased taxation due to Section 24; Rising interest rates reducing monthly cash flow; and changing legislation such as the requirement for EPCs to be a minimum of a C rating by 2025. This means that many landlords are becoming more frustrated and deciding to sell up, particularly since they've had incredible capital growth over the last 12 years. These landlords are not necessarily selling to get access to the equity but rather they don't want the responsibility or hassle of the property any more. In other words they could be perfect for a Lease Option. I predict that 2023 is going to be one of the best years ever to secure Lease Options. You upskill your knowledge about Lease Options to make the most of this.

If a property significantly increases in value during the Option Period, you can imagine that some owners might be reluctant to sell at the agree Option Price. However, you must remember they've entered into a legal contract and as long as the contracts have been put together correctly and both seller and buyer have had independent legal advice, then there's very little that an owner can do about it. They have to sell to you at the agreed Option Price. When your solicitor puts together the Lease Option agreement, they should also put a Power of Attorney in place, so that you can execute the purchase at any time, within the Option Period, without having to track down the owner and get them to sign the sale agreement.

I do hope you found this article useful and enlightening and now recognise just how powerful Lease Options can be for you when done correctly.

If you'd like to learn more about Lease Options and how to use them correctly, I currently have some free of charge, online training all about how you can use these powerful tools with your property investing in the 2023 property market, visit www.PLOtraining.com

When you fully understand about Lease Options, you will have a competitive advantage over most other property investors, who are completely unaware of these property investing tools, or how to use them properly.  Take action now. Come and register for this online training with me.