In this blog, I am going to explain to you how you talk to vendors so they agree to do a Purchase Lease Option (otherwise known as a PLO). I've been using Purchase Lease Options as a powerful tool to control property, where you can get cash flow and equity growth from a property you don't own. You look for someone who is selling their property. There are two fundamental reasons people sell a property. The first reason is that they are trying to access the equity from the property. The second reason is that they just don't want the hassle.
If someone is trying to access the money, they probably need the money now for something else. This could be paying a debt, paying for their daughter's wedding, or investing in a business. In this case, a Purchase Lease Option is probably not going to work because they are not going to get the money now. The idea is that we rent the property for a number of years and we then have the right to buy the property at some point in the future. We are not obligated to buy it, we may not buy it, but we intend to.
So if they are selling the property because they money now, a Purchase Lease Option is not the appropriate strategy to use. If they are selling a property, and don’t need the money (which they are going to put it in the bank), or maybe there is no money from the sale because there is no equity – a Purchase Lease Option could work particularly well.
Find Out More About Your Motivated Seller
First of all, it's important to remember that we want to work with Motivated Sellers. These are people who have got a property problem and they want that problem solving. It is then because of this, that they are more flexible on the price and on the terms of the sale.
We need to then find these Motivated Sellers (This is what I talk about in my book, Property Magic) and once we have found them, we need to understand their problem. We ask them questions, to dig deep and find out what's going on for them. How can we possibly help them to find an ethical win-win solution? When you are presenting a Purchase Lease Option to the owner, you want to offer a better solution to whatever the alternative is.
If someone has a property that is worth £200k - in today's current market, they are probably not going to get the full market price. The market is a bit shaky and there is a lot of uncertainty due to various factors. So if a property is worth £200k, in today market most investors might offer between £185k to £190k. However, when we do a Purchase Lease Option we are not buying it now, we are buying it in the future.
We can then say to the property owner, 'would you like to get a sale now, which I could do for less money, or if you're a bit flexible and you're prepared to wait for the money, I can give you more money'. If they then say, 'yes, I'm prepared to wait if I get more, how can we do that?', you can say 'instead of buying for £190k which might be a discount on today's price, we can offer the full £200k. Why might we do that? Why would we buy at the full price? Well, today's full price might be a discount in the future, if the value goes up.
“How can we possibly help them to find an ethical win-win solution?”
Agree Your Price For Purchase Lease Options
We agree the purchase price for the property at the beginning of the option period. Let’s say we agree a price of £200k today. In five years time, the property might be worth £250k. But we can buy it for the agreed price of £200k. So even though today it is full market price, today's full market price might be a discounted price in the future. We can then afford to pay them more money than they would get if they sold it right now. So that's a first benefit we can give the property owner. In the meantime, we pay them a monthly option fee and we get to use the property.
The great thing about this strategy is that it is compatible with many different strategies.
The Negotiation Process
There are several things you will negotiate and agree on. You obviously have to agree on what the purchase price is. You also have to agree the upfront option fee and the length of the Option Period. With a Purchase Lease Option, you pay a monthly payment to the owner for you to be able to use the property. You could move into the property yourself and live there. You could also rent it out as a HMO, or as Serviced Accommodation - whatever you want.
The great thing about this strategy is that it is compatible with many different strategies. It's about finding the owner who doesn't need the money now. They are then prepared to wait because they can see it as a better solution.
Imagine someone has a property that is owned outright. Some people believe incorrectly, that you can only do an option which is in negative equity. In fact, you can get an option on a property which is 100% debt free. It might be worth £200k with no mortgage at all. If the owners do not need the money, they are probably selling it because they no longer want the hassle. If they put that money into the bank, they are not going to get a good return on that money. We can show them how our alternative is better for them.
We say 'we'll give you the full price, but actually let's do it in maybe 3-5 years time'. You then go on to say 'and in the meantime, we'll rent that property and the income we'll give you is much more than you could earn if you just put it in the bank'.
Your Part In Maintaining The Property
We take care of the property, we've got to obviously insure it and maintain it. We treat the property just like our own property. This is in exactly the same way as if you did actually buy it. You'd be doing all the maintenance, all the work.
You need to check to make sure it's not falling apart alongside checking to see if it is going to cost you a fortune to look after it. If it is, you probably don't want to buy it anyway. As long as the maintenance is reasonable, you just look after it like you would do if you actually owned it.
Do They Need The Money?
The whole point about speaking to sellers is understanding a few things. First of all, do they need the money now? If they do, a Purchase Lease Option probably won't work. If they need some money now, you need to know how much? The property might be worth £200k, with a mortgage of £120k and equity of £80k - they may not need the whole £80k but actually just need £20k. They are probably selling the property because they want access to that £20k. Maybe we could give them the £20k as an Option Fee. This is still a lot less than what we'd put in if we actually brought the property with a 25% deposit, which in this case would be £50k. Any Option fee that you pay up front, comes off the end purchase price anyway.
You would be putting in a lot less money, than if you were buying it and that's why we get a much higher Return on Investment with a Purchase Lease Option. Speaking to sellers is about keeping the language simple. Never ever use the terminology 'PLO' or 'Purchase Lease Option'. They don't know what that means. Keep it simple, it's about renting the property for a period of time. If we like it, we will buy it sometime within the option period. That's how we explain Purchase Lease Options to people. That's how you get them to agree. If you complicate it and they don't understand it, they're not going to agree.
Keep it simple and easy. Make sure what you're proposing is a better alternative than what else they could do. This is how you are going to get owners to agree to Purchase Lease Options which means you can get cash flow and equity growth - from property you don't own.
FREE Purchase Lease Options Training Available
If you would like to learn more about Purchase Lease Options, Simon Zutshi has put together a FREE On Demand Master Class - all about successful PLO investing.
To find out MORE about how you can access this valuable PLO training at NO COST - click here.
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