The Complete Guide to Lease Option Agreements

What is a Lease Option Agreement?

A lease option agreement is where the buyer is given the opportunity to purchase the property at a later date for a price agreed today. They then lease the property for a fixed amount every month until that date.

When the date rolls around, they will be presented with the option to buy the property and can either accept or refuse. It’s important to note the buyer has the OPTION to buy, not the obligation.

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Here’s what will usually be included in a lease option agreement:

• The monthly charge – this will cover the Landlord’s mortgage and all other expenses. It will also usually include a bit on top to provide the Landlord with some profit

• The buying price – this will be the price you have the option to purchase the property for in the future.

• The terms of the dealThe terms of the deal – this will include the length of the lease and what happens If you don’t take the option to purchase. FYI, it will usually go back to the Landlord.

Not a lot of people know this, but you also must pay a charge for the contract to be binding. In contract law, this is known as consideration. It can literally £1. As long as it consists of economic value, it is counted as consideration.

How Long Does a Lease Option Agreement Last?

The lease element of the agreement can last as long as the seller is comfortable with. Typically, 5-year leases are used, but you can create a lease for 10 or even 15 years if you want. However, it will always be up to the seller and how long they’re willing to wait for the sale.

What are the Benefits of a Lease Option Agreement?

You might at this point start thinking: “why on earth would anyone accept a lease option agreement?”.

Believe it or not, there are numerous benefits to accepting lease option agreements, both for the buyer and the seller.

For the Buyer

The buyer essentially gets control of a property for nothing. As long as they continue to pay the Landlord every month, the property is theirs to do with what they wish (as long as it is in the contract).

This means the buyer can rent out the property to make a profit. If they have the right to modify the property, they can apply for planning permission and turn it into a HMO – providing a solid return every month.

The buyer could even turn the property into a short-term letting, advertising it on Airbnb and Booking.com.

Once the option is ready to be claimed, the buyer can purchase the house for instant equity if the price has gone up. They could then remortgage and continue renting or buy another property.

If the price has gone down, they can refuse to purchase the property and walk away from the deal.

For the Seller

The seller gets a guaranteed income every month from the property without any hassle or management costs. If they’re in negative equity, it also means they could wait until more of the mortgage is paid off, so they can still profit when they sell.

Saying this, lease options are difficult to land. Sellers who are prime targets for these kinds of deals are usually highly motivated to get their properties sold. They’d rather sell now and be done with it.

However, they still exist for a reason. Many sellers agree to LAOs all the time. You just have to get in front of the right people.

How to Find Lease Option Agreements

Lease options are tough to find. They require a motivated seller who is struggling to sell. This could be a tired landlord who doesn’t want to manage their portfolio anymore or a seller who is in negative equity.

Here’s a few methods to finding them:

Identify Properties that aren’t Selling

Slow to sell properties are properties that have been on the market for a while. They haven’t sold and the seller could be getting agitated.

These are great for lease option agreement opportunities.

You can reach out and probe as to why the property isn’t selling. Maybe the property is rundown and needs some work? Maybe the seller is in negative equity and can’t afford to sell at market value?

Whatever the case, you can offer a LOA as a solution to whatever problem they’re facing.

Discounted Properties

Slow to sell properties are properties that have been on the market for a while. They haven’t sold and the seller could be getting agitated.

Discounted properties are properties that have recently been lowered in price. These are great if you’re after a LOA.

If the price is being lower, it means they aren’t receiving any buyers. This could be your chance to jump in and offer to lease the property so they’re getting some sort of money. Of course, they may not always be up for this, especially if the property is residential.

Discounted Properties

Discounted properties are properties that have recently been lowered in price. These are great if you’re after a LOA.

If the price is being lower, it means they aren’t receiving any buyers. This could be your chance to jump in and offer to lease the property so they’re getting some sort of money. Of course, they may not always be up for this, especially if the property is residential.

Here, you’re looking for landlords selling an investment property. You want to approach them and find out why.

Are they old and tired of managing it? Are they frustrated with void periods? Have they had issues with tenants?

These are all problems you can solve with a lease option agreement. To a landlord, a fixed monthly rent with no void periods and zero management is a cracking deal.

Summing it up

Lease option agreement are a creative tool in your arsenal when investing in property. They are difficult to get but with the right sourcing and sales pitch, you can still land them (and many investors still do!)

To learn more about creative property investing tactics and more about property in general, see our knowledge centre now.

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