Today's blog is akin to last week's post discussing how you can enhance your living situation by becoming a tenant-buyer. Now, let's explore the other side of the coin: selling a property to a tenant-buyer. Whether it's one of your own properties or on behalf of another landlord, you stand to earn a fee for facilitating the transaction. This could be an ideal opportunity if you have a property you wish to divest for maximum profit or if you encounter other landlords seeking to offload their properties, allowing you to earn a fee while assisting them and enabling others to step onto the property ladder.
Equity in the Property the Day You Buy
One of the best ways to profit from property, is to make money the day you buy. This is instead of having to wait for the property market to go up. Buying at the right price is really important. Ideally you want to buy at below the market value, which means you have equity locked into the property the day you buy.
The best way to do this is to find motivated sellers. These are people who need to sell their property quickly. They may also believe speed and certainty is more important than the cash amount they receive. This means they might be flexible on the price and/or the terms of the sale.
How would the landlord benefit?
First, they rid themselves of the hassle, and that can be done very quickly. They don't need to sell at a discount, and they continue to earn a small income each month until the tenant-buyer exercises the option to purchase the property. This means that the owner of the property can potentially earn much more from the sale than they would through a conventional sale.
Additionally, the landlord benefits from reduced holding costs because the tenant-buyer assumes full responsibility for the property's maintenance, eliminating the need for the landlord to cover these expenses or pay a letting agent.
"A true win-win for all parties in the right circumstances"
The tenant-buyer must pay an upfront option fee, which we refer to as "getting started money," to secure the right to purchase the property at a predetermined price in the future. This fee typically ranges from at least £3000 to as much as £20,000, depending on the property's value. Putting down such a substantial upfront payment indicates the tenant-buyer's seriousness about purchasing the property.
If the tenant-buyer exercises the option to buy or assigns it to another party, the "getting started money" is deducted from the purchase price. However, if the tenant-buyer decides against purchasing the property and doesn't assign the option, they forfeit the upfront fee.
Consequently, this arrangement fosters a higher level of commitment from the tenant-buyer, who approaches the property with a different mindset and attitude compared to a typical investor relying on landlords to manage the property.
Who's the ideal tenant buyer?
Well, you are looking for someone desperate to get their foot onto the property ladder. They've been renting for a while, they just don't want to do that anymore, and they've got at least some money to put down as this is getting started money. Although they're not able to get a mortgage on the property right now, we expect they will be able to get a mortgage at some time in the future, and that's important to understand.
Let me give you some examples. Maybe currently they're a trainee and they've got a low salary, but if they're a trainee doctor or a solicitor or an accountant, once they qualify in a few years, they'll have a massive jump in their salary, which means it's probably going to be sufficient to afford the mortgage to buy the property. Alternatively, they've already got a high salary, but they've just not been living in the UK long enough to be able to get a residential mortgage. Normally you need to have lived in the UK for at least three years before you can get a mortgage, but with enough time, that's no longer a problem.
Lastly, another group of people may have had a bit of a problem with their credit rating, but given enough time, that credit rating can be repaired, at which point they will be able to get a mortgage to buy the property. The benefit for the tenant-buyer is that they fix the price of that property today, and given time to become mortgageable, they can purchase the property in the future within that option period.
A potential problem for tenant buyers
Now, there's one objection that the property owner might well come up with, and that's if they lock a price for the tenant buyer to buy the property. Even if it's slightly above the current market value, there's a pretty good chance that in a few years, the value of the property will have gone up and it might well be more than the agreed option price. Obviously, that's a benefit for the tenant owner, but the owner might well think, hang on a minute, I'm going to be missing out on some potential capital growth.
That is correct, but the answer to this objection is that if the owner wants to benefit from capital growth instead of entering a purchase option, they should just hold the property and rent it out in the normal way. When the value goes up in the future, they can sell that property and they'll probably get more money than entering a purchase lease option with a tenant-buyer. This is significant, but the owner would still have the hassle and the responsibility attached to owning that property. Remember, we are looking for properties that want to get away from the hassle, which is why they're considering selling the property now.
"It might've seemed like a good idea at the time of buying, but with what they know now and with the power of hindsight, they probably wouldn't buy that specific property again if they had the chance."
How Do We Find These Tenant Buyers?
If you've got a property to sell—whether it's yours or someone else's—you want to get a feel for how we find potential buyers. Well, remember, we are looking for people who want to get their foot on the property ladder as soon as possible. However, they're not able to get a mortgage right now, but they will be able to get a mortgage before the end of the option period.
So how do we find these people? Well, there are lots of ways. First, you can always put up a sign in the window of the property or outside the property saying something like “Why rent when you can buy this property for X pounds per month without the need for a mortgage?” Now, think about it, that's going to appeal to someone who's renting now but wants to buy, can't get a mortgage, and is looking for an alternative.
You could also have some leaflets printed with very similar wording and distribute them to all the properties that are within a few minutes’ walk of the property that you're trying to sell. Now, this is because someone who's maybe living locally, with their parents, and wants to move out but doesn't want to move too far, this could be perfect for them. Another source of potential buyers is speaking to your local mortgage broker who helps first-time buyers obtain their first residential mortgage.
Many first-time buyers struggle to get finance when they want to buy their first property, but they might be able to get a mortgage in the future, so they could be perfect buyers. So, you could work with these mortgage brokers to help their clients get a foot on the property ladder, pay them a small fee, and then they can arrange the mortgage in a few years when the buyer is more likely to be able to secure it. This is much better than the mortgage broker making nothing because they're unable to secure a mortgage for their clients.
Putting a buyer into that property could be a great solution. The buyer gets their foot on the ladder, gets to treat the property like their own home, looks after it, and takes the hassle and cost of management away from the owner. So, as I said, this is a true win-win for all parties in the right circumstances.
This is one of the many ways that you can use purchase lease options, and I explain all of the methods in my brand-new book, Lease Options Magic. Now, I'm giving away a chapter of this book all about how to sell to potential buyers. So, if you'd like to get a complimentary copy of that chapter emailed to you, just go to this website, go to www.leaseoptionsmagic.co.uk, complete your details, and we'll send you an email with a PDF copy of that specific chapter.
I'll put the link in the show notes for you.
So, until next time, as ever, I encourage you to invest with knowledge, invest with skill.
Professional Property Investor | 18 Years Experience
Founder and CEO of property investors network
Author of Amazon’s No.1 Best Seller “Property Magic”
Host of Property Magic Podcast Available on iTunes
Visit My Website: https://simonzutshi.com/
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