Lease options represent a great choice for the wise property investor. Essentially for very little money, you can invest in a property with the option of buying it at a later date (and often at a price lower than the market rate). Sounds perfect, right? But there are things you need to think about. This article explains what a lease option agreement is, how to find deals, and how to package lease option property deals to sell to investors.
What are lease options?
On principle, it is quite simple. A lease option is a sort of ‘combo’ agreement.
You lease the property from the owner by paying them a set amount. This gives you the right to manage and rent the property.
The ‘option’ allows you to purchase the property at a pre-agreed price in the future.
So you have the lease and the option… Or as it is commonly known a “lease option agreement”.
What does a Lease Options Agreement contain?
The key is in the name “agreement”. There are several terms that you will want setting in stone before any payment is made: –
With regards to the ‘lease’ part of the agreement: –
- The lease option agreement needs to specify the duration or length of the agreement. Once this period has elapsed, you can give the property rights back to the owner or choose to buy it.
- The lease option agreement also needs to specify how much will need to be paid to the owner monthly.
Regarding the ‘Option’ part of the agreement: –
- The lease option agreement will specify the price at which you will purchase the property in the future (if you so choose)
- The agreement should also specify an upfront payment to be given the option (which could be as little as £1 and is known as the Option fee).
How to Source Lease Options Deals
Sounds great, right? So how do you go about sourcing lease option deals?
If it seems that the ‘deal’ is heavily weighted in your favour, that’s because it is. Most people consider releasing their property as a lease option deal as a last resort.
You’ll generally find that those keenest to take up a lease option are those in negative equity, or have unfavourable circumstances that make a sale difficult. Examples could be: –
- Recent divorcees
- People who want to quickly relocate
- Those struggling to pay their mortgage
Although it sounds rather ruthless, remember in terms of a lease agreement you are guaranteeing a legally binding monthly payment, which should cover the mortgage.
So how do you go about sourcing lease options deals?
There are several methods that you can use. At the end of the day, when you are just beginning on your property investment journey, you want to start small. A single property will do. So don’t be perturbed by a lack of people flocking to ‘give up’ their property.
However, it pays to get good at finding willing participants, and if you are looking to make a business from sourcing and packaging lease option property deals, you’ll want to build up a full portfolio. Here are some ideas to find properties: –
- Target your campaign to areas that have a high likelihood of being in negative equity. You can use a newspaper advertisement, posters, flyers.
- The internet lets you have a massive outreach. Social media, in particular, is great for targeted marketing and advertisement.
- Keep an eye out for overpriced properties, there’s a good chance that the current owner may be trying to recoup their losses.
The above comes with a disclaimer. Choose your properties and owners carefully. For most this won’t be a preferred option and their behaviour could cost you significantly if they don’t honour the agreement. This is even more pertinent if you aim to source lease option deals to sell on to an investor.
How to Package Lease Option Deals | Selling to Investors
So you’ve secured a lease option deal with a vendor. All the paperwork is above board, now it’s time to present the package to investors. How you do this will have a direct result on your success. Here are some things that you will definitely want to do: –
You will need to let people know that you have got a great opportunity waiting for them. Again the internet is your friend. Use or join groups that will have members that you want to appeal to. Facebook and LinkedIn are both great options
Create a Teaser Brochure
The last thing that you want is a sneaky investor pinching the deal from under your nose. You want to give them some good information, but not enough that they can approach your vendor directly and undercut you.
The best way to get around this is to create a ‘teaser brochure’. It doesn’t need to be overly long. Just enough to pique their interest. It could include: –
- A couple of well-shot pictures
- A basic property summary
- A financial summary with things such as purchase price, option agreement length etc.
- Details of how much they could earn from their investment. Expected income is one area that most investors are certainly most interested in.
Filter your Options
As with any sale, you will get varying levels of interest. You should aim to avoid two things: those who are wasting your time, and those who aren’t credible. Make a shortlist of realistic propositions and do your due diligence.
Verify Your Investors
Now comes the hard work. You still want to protect your own time and investment. This next point is a set in stone requirement… Make sure before sharing in-depth details, such as addresses, or a full brochure that you have a non-disclosure agreement or a sourcing contract signed.
In tandem with this, you want to check who is the most likely to go through with investing in the lease option package. You will want to see proof of funds, as for an agreement in principle, see some bona fide ID.
Essentially what you require is for them to show some effort and commitment to the deal too. You’ll soon find out whether they are serious
Agree on the Terms and Conditions of the Lease Options Package
The devil is in the detail. If you have a sourcing contract already signed, you will already have agreed on the fees if they go through with the deal. Alternatively, send the terms and conditions over to them. You will want to explicitly define how payment should be made, who it should be paid to and how much it actually is (including reservation fees).
Packaging a lease option agreement needn’t be difficult, the benefits to both you and the investor should be obvious. A large part of the process is filtering who might be a realistic buyer, and ensuring that the deal goes smoothly. Transferring lease options can be a good investment of time and resources provided that you do it correctly.