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  • Buy-to-Let

    option lease back

    Hi all
    Can you explain how a option lease back scheme works with a vendor who does not want to leave the property but just needs to stay in the property.
    Regards
    Rob
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    Hi Rob,
    Good to see you at the meeting yesterday.
    The above scenario would come under SARB I believe. The lenders are very against this, as they want vacant possession on completion. The FSA is also introducing legislation to regulate this section of the industry. They are making it very hard and expensive for anyone to operate as a SARB trader.
    Perhaps John Corey (REI) can give further information as he is very knowledgeable on this subject. I will ask him to comment.
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    Rob,
    What does it mean when you say "a vendor who does not want to leave the property but just needs to stay in the property".
    To be a bit brutal...
    1. What vendor needs to remain in the property after they sell? If they really want to stay they should not be selling.
    2. What a vendor wants and what is possible are not always the same thing. Lots of people want to let someone else take on the financial risk while they remain in the home. Just because they want to do so does not mean it makes sense or will be possible.
    So, moving on from what the vendor wants...
    The sale and rent back (SARB) market is about to be closed or heavily regulated. The FSA has received too many complaints and they have waded in w pretty heavy. How it shakes out is anyone guess. The deadline has been announced by the FSA along with interim guidelines or registration details. The prevailing view is a very small set of investors might be approved and the vendors will need to jump thru a number of hoops before they can accept the deal.
    An option can be combined with a lease or they can stand alone (2 separate agreements or both wrapped into one agreement). You can have an option without a lease. You can have a lease without an option. Though this might seem clear it is best to remember the above when you are considering a deal. It might be best to use one agreement or another or a combination. When wrapped together a breach of the lease could terminate the option. When separate a lease can be broken while the option remains in place.
    A lease is a lease is a lease. All the things you know about one in the UK (AST or otherwise) is valid. The option is a unilateral agreement where you are paying the vendor to buy the right to purchase at a future date. If you were doing a SARB then you would be the owner and you would the one selling the right to buy to the other side. For the option to be valid they party that wants to obtain or buy the option needs to pay consideration. Something of value. Cash is the normal but it does not have to be cash. If the buyer of the options does not pay consideration to the property owner then the option is not valid (void; as if it never existed).
    Options are very old, very well understood in other sectors. Maybe new to residential property investors in the UK but not new in any legal sense. The details need to be right for a judge to uphold what the option says. Not complicated. Just important to do it right.
    John Corey
    https://www.ChelseaPrivateEquity.com/blog
    https://www.Twitter.com/John_Corey
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    John Corey 


    I host the London Real Estate Meet on the 2nd Tuesday of every month since 2005. If you have never been before, email me for the 'new visitor' link.

    PropertyFortress.com/Events

    Also happy to chat on the phone. Pay It Forward; my way of giving back through sharing. Click on the link: PropertyFortress.com/Ask-John to book a time. I will call you at the time you selected. Nothing to buy. Just be prepared with your questions so we can use the 20 minutes wisely.

    When you make the following statement, "a vendor who does not want to leave the property but just needs to stay in the property", I too took this as referring to a SARB transaction. In this instance a lease-back would involve you, the investor, allowing your new tenant to ‘lease back’ the property using an AST agreement.
    Rather than just a lease back do you mean a lease back with an option to buy back? If yes then this could be accomplished by entering into an option agreement - as well as an AST - with your SARB tenant. This might appeal to your new tenant if they feel their financial hardship is only temporary.
    To accomplish this you write an Option agreement that gives the tenant the right but not the obligation to purchase (back) the property on or before the date stipulated in the Option.
    The buy back price will be dictated by whatever method you decide is the most appropriate to you. Some companies’ base it on today’s MV while others prefer a percentage of the MV when the option is exercised. Some charge a monthly fee while some do not. Some put all fees towards your eventual deposit while some do not. You could stick to one method or alternate depending on the needs of your individual clients – there are no hard and fast rules.
    What firms do seem to agree on is the inclusion of a proviso that voids the agreement if the tenant misses a rent payment during the term of the option. (As mentioned by John)
    Rob, forgive me if I have misinterpreted you but I based my answer on believing you meant a lease option that ‘included’ an option to buy back.
    Best wishes.
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    This is slightly off topic and not directly related to Rob's question.
    While looking through some property files I came across another description of a lease back provided by Lisa Orme. This is new to me so I thought it might be of benefit to others. My condensed version:
    This term can be used to describe the purchase of a show home, in a new development, which you immediately ‘lease back’ to the developer. An arrangement of this sort could last several years depending on the size of the development. The developer will be happy to have a ‘sold’ property on their books as well as an early injection of cash. On the downside, your rent will probably be below market rent and you'll need to be sympathetic if the project experiences delays. On the plus side, no tenants living in the property will mean less management issues and negligible wear and tear.
    Best wishes.
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    Thanks for this Marcus. This is when a show home is sold but then leased back to the developer for use as a continued show home. I have encountered two problems with this.
    First of all, the showhomes have a lot of up-grades and the developers charge a lot more for them - usually between £20 and £30K. However, valuers don't see the up-grades as adding value and value them at "normal" prices.
    Secondly, the lease back must be disclosed to the lender. Many lenders do not like them and will not lend on them. If they do, they will take the lease back as an "incentive" and net it down to the net price i.e. deducting the total value of the rent back incentive.
    These do sound good in theory, but in practice they are hard to finance unless you can buy them for cash.
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    Thanks for your thoughts.
    Regarding the following comment:
    "Many lenders do not like them and will not lend on them. If they do, they will take the lease back as an "incentive" and net it down to the net price i.e. deducting the total value of the rent back incentive."
    Where is the incentive if you are renting the property back to the developer at an BMV rent? Or looked at from another angle: What constitutes an incentive in the lenders eyes? (He says scratching his head!)
    Rgds
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    The lender (and therefore the valuer) regards it as an incentive so they add up the total rent accured over the "lease back" period and deduct it from the net price. They see it that the developer has "assisted" the purchase by guaranteeing the rent and it is a monetised incentive. I believe it's a bit daft but I've looked into doing these on a couple of occasions, and this is how the valuer viewed it!
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    That's the answer I was expecting but because it seemed so daft I thought I would check.
    Thanks for clearing that up.
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    I hadn’t spotted this post before.
    We have done a number of these but not sure many lenders would be too keen these days.
    We used standard buy to let lenders/products but had to show them the lease the developer provided – we have always been upfront with the lender.
    We also had to use a specialist insurance product.
    There was never any deductions for incentives as they were simply treated as ordinary rentals by the lenders and the valuers never had a problem either.
    It was great while we did them but in the current climate I don’t think you would find many lenders.
    That being said developers are off loading at incredible prices so if you could get commercial finance to stack you might be able to still do them.
    Lisa

    Read my blog
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    Lisa All comments are for education and information purposes only and do not construe as advice or a financial promotion. No liability is accepted for comments made. If you wish to receive information in an advisory capacity then please contact me about becoming a client. www.keys-mortgages.com