Tenant Buyer Strategy Explained


In this blog I'm going to explain all about the Tenant Buyer strategy. Now, I'm going to look at this from two perspectives. First of all, from you selling a property to a Tenant Buyer, which is a great way for you as an experienced investor to get rid of property that you don't want at full market price. I am then to talk about you becoming a tenant buyer, which is a great way for you to get your foot on the property ladder.

It's a very powerful strategy you can use, but it's massively misunderstood. Now, a tenant buyer is linked to Purchase Lease Options, and that's another strategy that many people have heard about, but they don't actually understand correctly. So I'm going to set the record straight and I explain how you can do a Tenant Buyer strategy correctly so that everybody wins in the equation.

Tenant Buyer Strategy for a Landlord

Firstly, let's look at it from the point of view of a landlord, someone who has a property that they no longer require. As I said, I've been investing in property since 1995 and over that time, those 25 years, I've bought a few properties which at the time seemed like a really good idea, but if I had my time again I probably wouldn't buy those properties knowing what I know now. I'm sure if you are a landlord and you've got a number of properties, you may well have one or two properties in your portfolio which you don't particularly want. So what can you do? You could put them on the market and you can sell them depending what's happening in the market, that may or may not be easy to do. Normally when you sell a property, if it's worth £200,000 let's say, as a landlord selling it you probably won't achieve the full market price. However, using a Tenant Buyer strategy you can sell that property for the full market price.

How do you do it? So we find someone who would love to get their foot on the property ladder, but they don't quite know how to do that. Maybe they don't have enough of a deposit yet, which is one big block to people getting on the ladder, or maybe they can't get a mortgage right now, but they will be able to in the future. We can give these people the opportunity to come into your property and effectively rent it from you for a number of years, but then they have the right to eventually buy that property at a price that you agree today.

Obviously over time we expect property prices to go up. As I write this blog in 2021, I expect property prices are going to come down in 2021, but with a long enough period, a five, seven year period, that'd be plenty of time for prices to maybe go down, to recover, and come back up again.

Let's say you've got a property that's worth £200,000  right now. If you're trying to sell that property, it's unlikely you'll get the full market price, but you go and find a Tenant Buyer and you give them the opportunity, you enter into a legally binding contract, giving them the right to buy that property for the agreed price of £200,000. Now, you agree with the price now, and yet they get to buy anytime within that option period. Let's say it's five years time. So in five years time that property might well be worth more than it is now. It might be worth 230, 240,000 pounds, and you will only get the £200,000 that you agreed.

 

Tenant Buyer vs Your Normal Tenant

However, it's probably more than you would get if you actually tried to sell the property right now, because you might think, "Well, why on earth would I allow someone to get that capital growth? I want to get that." The whole point here is we want to make it an ethical win-win for everybody involved. It's got to be good for you, it's got to be good for the Tenant Buyer as well. So we put the Tenant Buyer into the property and they're different from a normal tenant. A normal tenant, they pay you rent each month, but if something goes wrong with the property, if a handle falls off the door or the boiler breaks, they will expect you to fix it as a landlord. But a Tenant Buyer, they move into the property and they get used to being a home owner.

You agree with them that they need to look after the property, they need to do all the maintenance jobs as they would if they actually bought the property. This gets them ready for home ownership. What that means is you don't need to have a letting agent looking after the property and you don't need to do it yourself and you don't have the cost of ongoing maintenance. So although you still own this property, it stays in your name, and if there's a mortgage, the mortgage is still in your name. What it means is you are going to make more money from that property because you're not paying for maintenance or management fees, because the tenant is looking after the property, treating it like their own. So this is a really good benefit for you being a Tenant Buyer.

The other thing is, normally if you sold that property, there might be a mortgage you pay off, let's say there's an equity, and you might use the equity on other property or you might pay down some debt - if you don't need the money right now you would probably just put it into the bank. We know that money in the bank is not going to give you a very good return, but if you're still renting the property out, instead of selling it, you're not only covering your mortgage, but you're still making some profit from that property.

Let's say you're making £500 a month profit from that property. You're going to make £6,000 a year. If you've got another five years of that, six times five is £30,000. So as well as selling the property for £200,000, you're actually getting that extra rental income, that extra £30,000. So you're actually getting 230 from that property, which is a lot more than if you sold it right now and just put the money in the bank. This is why this can work really well for you as the owner of the property to use a Tenant Buyer strategy. We are helping this person get their foot on the ladder.

“They could walk away, they can change their mind if they want. So it’s a very flexible agreement for them. If they want to buy, you have to sell it to them. You cannot change your mind.”

Choosing Your Tenant Buyer

Now, it's very important when you select someone to be a tenant buyer that you get them to put down some getting started money. Ideally three or 5,000 pounds as a bit of a commitment for them to look after the property. Remember, they're not like a normal tenant. They're going to maintain the property for you. We want to get some commitment to make sure that they want to buy the property from you because ultimately this is a property you don't want, you want to sell it on to them. Now, here's the thing about a purchase lease agreement, which is what you are doing with this person. You're giving them the right to buy within the time period if they want to buy. They don't have to buy. They could walk away, they can change their mind if they want. So it's a very flexible agreement for them. If they want to buy, you have to sell it to them. You cannot change your mind. You have to sell it to them at the price that you have agreed. It's only fair that you commit to what you're offering them. So what this means is if they come and decide to buy, great, they'll save up a deposit, they'll get a mortgage. If they decide not to buy, they get to walk away. Now, hopefully they should give the property back to you in the same condition or better condition than when you gave it to them. When someone moves into the property as a tenant buyer, they fully intend to live and stay in that property and eventually buy it. You'll find people sometimes come and modernise the property. They'll decorate it, they'll put new carpets in, they might put a new kitchen in, they might put some decking at the back, they might, you know, landscape the garden, they'll do these things because of them treating it like their own home.

However, circumstances change and they may decide not to buy. If they decide not to buy, they lose their getting started money, which was the initial option fee that they put down. Now, that's your money and you can use that just in case the property is not in such great condition. You can get the property fixed up and you could find another tenant buyer. And the reality is not all tenant buyers will eventually buy your property because sometimes life gets in the way, circumstances change, and they decide not to buy the property. But hopefully if everything goes to plan they come and buy the property for the agreed price, you've had that extra income with no hassle, no expense, over the period of the option. So, that's why it works really well for you as a property owner.

 

Choosing to Become A Tenant Buyer

Now let's look at it from the perspective of you going in as a Tenant buyer. There are a couple of ways you can use this. If you don't have a property yet, your own home,  struggling to save a deposit, get the mortgage right now, this can be a great way for you to get your foot on the ladder and lock in a price. I've already explained it from the landlord's point of view, let's look at it a bit more from your point of view.

The biggest problem people have when they're wanting to get into property is that if they don't get in now, they know that the value of property goes up over time. It doesn't always go up, it comes up and comes down. As I said earlier, I think price is going to come down in 2021, but a Purchase Lease Option, which is what you're doing with the landlord as a Tenant Buyer, is a really fantastic solution for you. You see what happens is you get to move into the house, you put down some 'getting started' money, that's your commitment to show that you want to buy. My belief is you should make sure that you want to buy this property and you can buy it in the future. There's no point you're going to live in a million pound property hoping to go to a buyer if you're earning £10,000 a year. You're just never going to get the right mortgage.

So you've got to make sure that when you move in, assuming you can get mortgages in the future, that you're going to earn enough to be able to get the required mortgage to actually buy that property. As a first time buyer you might be able to get a 90 or 95% mortgage. You'll need a little bit of saving, but it's very important that before you become a Tenant Buyer, you check with a Mortgage Broker who's got access to the full mortgage markets, to find out if you can get a mortgage. There are a number of reasons why you may not be able to get a mortgage now, but you might be able to get one in the future. The first one is maybe you're a trainee. Maybe you're not earning a huge amount of money now, you might be a trainee accountant, solicitor, doctor, but as soon as you qualify, your salary will jump up and you'll have enough salary to be able to afford to get the mortgage you need to buy the property you want to live in.

So that's the first thing. Maybe you're not earning enough now, but that will change over time. Maybe you're already a very high earner. Maybe you are a foreign doctor, you've come to the UK, you got a really high salary, but because you haven't lived in the UK long enough you can't get a Residential Mortgage right now. With enough time, that problem will be solved and you will be able to buy a property. You should absolutely be considering that for the future.

Maybe you can't get a mortgage right now because maybe there's a blip on your credit file. Maybe you've missed a payment for something and you can't get a mortgage right now, but with enough time that will drop off your credit file, your credit score will improve, and you will be able to get a mortgage. As long as you can get a mortgage in the future, it doesn't matter if you can't get enough of a mortgage now, it's important you can get one for the amount you're going to need to buy this property in the future. Otherwise there's not much point you being a Tenant Buyer because you're not going to be able to exercise the Option and the right to buy this property.

“But if you’re just renting at the moment, I would suggest why not look for a property you can take on as a tenant buyer using a purchase lease option to protect yourself there.”

Assigning the Benefit of the Option

You could assign the benefit of that Option on to someone else. Most Option agreements are assignable if you decide not to buy. Let's say you've got a right to buy at £200,000 and the value goes up to 230. You could maybe sell that to someone else for 220. So they're getting a discount and you would get the difference between what you agreed to buy the property for. The Option price, the £200,000, and the 220 that someone else came and bought from the owner instead of you buying, that £20,000 difference comes to you. That's a really nice reward for you.

Personally I think everyone should  become a Tenant Buyer rather than just being a normal tenant because you've got the potential of benefiting from the equity growth in that property. You need to find a landlord who's happy to sell their property and understands about Options. The problem is most people don't really understand how this works. But if you're just renting at the moment, I would suggest why not look for a property you can take on as a Tenant Buyer using a Purchase Lease Option to protect yourself there.

Obviously you need to pay the monthly income, the rent each month to the landlord, you need to look after the property, but you can come and add value to a property. You can fit in a new kitchen and you're going to get the uplift value, either to buy yourself or you can assign it on to sell to someone else. You do need to make sure you do these things correctly.

I have put together online training all about Purchase Lease Options, and it is completely free. There's a link below this blog, if this topic has been of interest to you either as a landlord or to get rid of properties, come and join this valuable training. Find out how you can use Purchase Lease Options to become a Tenant Buyer or to sell property to Tenant Buyers.



Click on the link below to come and join the live training. Until the next blog, I encourage you to invest with knowledge, invest with skill. Also click on the link below to come and join me for some live online training all about how you can use Purchase Lease Options and Purchase Options in your property investing. Because it's live training you can actually ask me any questions you've got about these incredibly powerful investing tools. So click on the link, book the training right now.

FREE Purchase Lease Options Training  - LIVE

If you would like to learn more about Purchase Lease Options, join Simon Zutshi for some live online training, all about how you can use Purchase Lease Options and Purchase Options in your property investing.

Click here to register and get your questions answered about these incredibility powerful investing tools.

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