Creative Ways to Sell

Warning: None of the Creative Solutions explained here are regulated by the FSA/FCA. Because of the large amounts of money involved in property transactions, these inevitably attract some people who are unscrupulous, dishonest, greedy or incompetent. Research thoroughly and always take INDEPENDENT Legal Advice.

Lease Options

With a Lease Option, you give someone (an “Optionee”) an option to buy your property within a specified timeframe, e.g. 10 years. It is important to understand that such an agreement gives the Optionee an option, but not an obligation, to buy a property.

This means that they can walk away from the agreement at any time. They will normally pay you an amount of money for the Lease Option – in fact an Option Agreement is only legally valid if it is secured on an amount of money – however this can be as little as one penny!

Usually the amount paid for the Option is relatively low, less than £1,000, as the Optionee may not take up the option to buy, and so is unlikely to be willing to pay a large amount for it.

When the option contract is agreed, it will state the price, which the property can be bought for, should the option be exercised. As the sale will usually take place some years in the future, you could sell your house for the full value (at today’s prices).

In most cases the Optionee will then make the monthly mortgage repayments, or a contribution towards these, on behalf of the property owner, until such time as the option is exercised, or the contract reaches its end date.

The Owner will move out of the property and the Optionee will normally let the property to a tenant, and benefit from the rental income. For this to work for the Optionee, the rental income will need to be higher than the mortgage repayments.

Lease Option Agreements work because the Optionee is able to offer to buy at a price in the future that wouldn’t be viable now. For example, assuming the property is worth £150,000 today, and the mortgage debt is £150,000 (so there is no equity), an Investor would be unwilling to pay £150,000 now.

However, in the expectation that prices will rise in the next 10 years, he might be willing to take an option to buy at £150,000 within the next 10 years. If prices increase, so that after 10 years the property is worth say £225,000, then buying at £150,000 at that time has enabled him to secure a bargain.

There are clearly benefits to both parties of such an arrangement. For example it could be that the Owner is unable to afford their mortgage repayments and so avoids having the property repossessed.

Or the Owner needs to relocate, so this enables them to rent or buy elsewhere. In both scenarios the Optionee is also happy as he has the opportunity to benefit from rental income now and to buy at today’s value in the future.

Risks and Problems with Lease Options

  • No guarantee of a sale – usually dependant on House Price inflation which cannot be predicted (prices might even fall)
  • Little redress if the Optionee wishes to withdraw at any stage
  • No guarantee that the Optionee will make the mortgage repayments
  • If the Optionee withdraws and the property has been tenanted, it might be in worse condition than it was prior to the Option being agreed

Option agreements have become popular with smaller Investors since the onset of the Credit Crunch, as for many of them it is now difficult if not impossible to buy properties using Buy to Let mortgages. In many ways these agreements are loaded in the Investor’s favour as they can benefit from the rental profits on a property without having to buy it. If property prices rise, they can buy, and if they don’t rise to an acceptable level, they can walk away.

Another concern is that if the rental profitability is reduced, for example if the mortgage payments increase due to Bank Base Rate rises, the Investor can walk away, and the Owner could be in a worse position than prior to the Option agreement, if prices have fallen or the condition of the property has deteriorated.

Despite this there are many Option Agreements in existence that work to the benefit of both Owner and Optionee.

Sandwich Options

A Sandwich Option is where someone takes out an Option to buy your property and then gives someone else the Option to buy it from them when the first Option is exercised.

The second Option price will be at a higher amount, to generate a profit for the person creating the Sandwich Option. You would not normally even be aware of the second Option as it is an agreement between two other people.

It could be argued that you don’t need to be concerned by this. However, the more links there are in the chain, the more opportunity there is for things to go wrong, due to malpractice, incompetence or pure bad luck.

Exchange with Delayed Completion

In a typical property sale, contracts are exchanged to create a legally binding sale, and the Buyer pays a deposit (typically 10% but can be any amount). Completion takes place either simultaneously, or shortly afterwards (e.g. a week or two later).

However, completion can take place at any time. It might suit both the Buyer and Seller to delay the period between exchange and completion for a longer period, say 5 years.

The main benefit to you if you choose this route is that you will receive an amount of money now which could help you to move on with your life, for example if you need to relocate for a new job.

You will however still own the property and be responsible for making the mortgage payments.

Most Exchanges with Delayed Completion will also involve an arrangement for the new Owner-to-be to make these mortgage payments on your behalf, and to let the property to a tenant.

Dangers of Exchange with Delayed Completion

The risks and problems of Exchange with Delayed Completion include:

  • If the Owner-to-be cannot or will not complete on the sale at the agreed date, you will have to take legal action to force this, or to claim compensation, which could be expensive, and maybe even futile, for example if the other party has become insolvent
  • If a mortgage is required to complete the purchase, the Owner-to-be can’t be sure that a mortgage can be secured in several years time
  • No guarantee that the Optionee will make the mortgage repayments

As with Lease Options, EDC agreements have become popular with Investors since the onset of the Credit Crunch, as for many of them it is now difficult if not impossible to buy properties using Buy to Let mortgages.

Exchange with Delayed Completion is generally considered a fairer way for the Vendor compared to a Lease Option, as an actual sale has been contractually agreed.

However there is still some risk, as a lot can happen during the several years between exchange and completion. Considerations such as what happens if the Owner-to-be dies or becomes bankrupt need to be considered before entering into these arrangements.

The worst situation for anyone selling their property this way is what will happen if the sale doesn’t complete and the condition of the property has deteriorated significantly, perhaps due to damage by tenants.

Lease Options and EDR Arrangements and staying in the property

These arrangements are sometimes offered to people as an alternative to Sell and Rent Back now that such schemes have been closed down by the FSA.

However, The FSA state that if a contract allows you to remain in your home, it is likely to be a regulated SARB agreement, so the firm or individual needs to be regulated by the FSA. See http://www.fsa.gov.uk/consumerinformation/product_news/mortgages/lease-options.

If you enter into any type of agreement considered by the FSA to be a Rent Back agreement, and subsequently encounter problems, you will not be able to raise a complaint with the Financial Ombudsman Service (FOS) or claim compensation under the Financial Services Compensation Scheme.

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