How to Sell Your Property on a PLO

In this blog, I’d like to share with you how you could sell property using a purchase lease option. Now I’ve been investing in property since 1995, and I’ve got a number of properties in my portfolio, which I bought at the time, seemed to be like a good idea. But if I had my time again, knowing what I know now, I wouldn’t buy some of those properties. And I’m sure if you’re a landlord with a number of properties, you might have one or two in the same situation.

Strategies to Consider

So here’s a great a strategy you can use to get rid of those properties. Now some of them might be in negative equity, some of them might not have much, or they might have plenty of equity, and at the moment, you might be renting the property out to a tenant, who pays you rent every month, you might be managing yourself, or you might have a letting agent looking after them for you. If something goes wrong, you have to fix the property, otherwise the tenant won’t be happy and may decide to leave.

Wouldn’t it be great if you could find someone who would take on the property responsibility for you? They look after it, do all the maintenance so you don’t have anything to do with the property anymore. But they pay you every single month without fail, no more voids.

Now, they may not pay you the full market rent, because after all their giving you a guaranteed income, but it should be enough to cover the mortgage, plus a little bit extra to pay the tax you’re going to have to pay because of section 24, because you can’t offset your mortgage interest anymore, and then also maybe a little bit of profit as well.

Some people have got properties where actually, they don’t want the property, so much that they are happy just give it to someone else, as long as they cover the mortgage and the insurance, and they got nothing to do with it anymore.

If you’re trying to sell a property right now, there are a couple of problems. First of all, in any market, unless it’s absolutely booming, which the market isn’t right now, it might be difficult for you to achieve the full market price for your property.

The other problem is, if you have a number of properties, every time you sell a property, you’re going to pay capital gains tax on any profit that’s been made. The profit is the difference between what you bought the property for, and what you sell the property for, hopefully a higher price, less any purchase costs and selling costs. The difference is the profit, the capital gain, and if it’s not your own home, you pay capital gains tax. A lower rate tax payer will pay 18% capital gains tax. A higher rate tax payer will pay 28%, so it can be quite a big chunk of cash.

The good news is, each year we each get a personal capital gains tax allowance, so we can sell any house, and the first, £12k or so is tax free using your personal Capital Gains tax allowance.

If you owe the property in joint names with a business partner or a relationship partner, you both get that allowance, so in other words you can sell a property, and the first £24,000 is tax free. That’s per year, not per property, so if you sell a lot of properties in the same year, you only get that allowance once. What most people do, if they’re trying to sell a number of properties, is they phase the sales over a number of years, so use the tax allowance in this year, they use the tax allowance next year, and the tax allowance the following year, and so on.

The biggest problem with this is that you have to hang around, to look after the last one until it is sold and only then you can go sit on a beach with a big pile of money, drinking cocktails if that’s what you want.

But there is a solution, which is to sell the property to someone on a purchase-lease option. So you still own the property, if there’s a mortgage, the mortgage is still in your name. But someone comes in and they commit to cover the mortgage and the costs, and little bit of profit for you.

Why is this beneficial for you?

Why is this beneficial for you? Well first of all, the person who comes in, they look after the property for you, so you have no more hassle. You still own it, but they take care of it for you. And they do that because they’ve got the right to buy it at some point in the future. If you’re trying to sell your property right now, you’re probably not going to achieve the maximum price, but given that someone’s going to buy in the future, they might agree to give you the full market price if you’re prepared to wait for when you get the money. So you might say to someone, “I’ll sell it to you for £200,000 now,” That’s the full market price, “But I’ll let you have five years to give me that money.”

You might think you’re missing out on capital’s growth, and yes you are, but if you sold the property now, you probably wouldn’t achieve the full £200K, you might only get £180k. And this person’s giving you the ability to get the maximum price, plus cover the costs and all the maintenance, and in the meantime, they might give you a little bit extra money. If you sold the property and put the money in the bank, you’d get hardly any return on it. And so actually, someone could give you a monthly income that is more than you’d earn if you just put the money in the bank.

Overall, you’re getting more money for this transaction. You’re getting a higher purchase price, then if you sold it right now, plus some extra income each month, which if you add that up over the length of the option period, might well mean that you are getting more for the property than if you sold it now. Yes, you’re going to lose the rental income, but if you sold the property now, you’d lose the income anyway.

There are two types of people you could sell the property to on this purchase-lease option agreement. You could sell it to a tenant buyer. Somebody who is going to live in the property themselves, someone who really wants get their foot on the ladder. They want to lock in a price, but for whatever reason, they can’t get a mortgage right now, but they will be able to get a mortgage in the future. Maybe their credit rating’s not good enough now. Maybe they’ve not been living in the UK long enough. Maybe they don’t have a high enough income now, but they will in the future. So all these things are problems that can be fixed in the future. And before they move in, you want to make sure they will be able to get a mortgage, and they will be able to buy from you, within the time period. That’s the first group of people.

The other thing you could do is you could sell it to another investor, someone like me. I find landlords who want to get rid of their properties, I’ll come in, we’ll agree a price now, at which I can buy it in the future. I’ll take on the property and I will rent that property out. I’m not moving there, I’m renting out. Obviously, I want to make a profit. What I pay the landlord is hopefully less than I can rent the property out for, so I make cash flow from that point onwards.

The whole point is, I want to make monthly cashflow, and I’ve got potential capital growth, that’s the benefit for me. The benefit for the owner, they get to walk away from the hassle. They don’t have to think about it anymore. And they can actually get more from the sale if they’re prepared to wait when they get the money, rather than if they’d just sell it right now. And potentially they reduced their capital gains tax as well.