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Lease Options are a strategy many 'Property Gurus' are teaching, a lease option is a legal agreement that allows you to control a property and generate an income from it, with the right (but not the obligation) to buy it later.
They are presented as a way to purchase, control, profit and receive any capital gains the property may make during the option period.
However, they fail to tell you one thing - by default they are UNMORTAGEABLE!
You cannot exercise the purchase of a property controlled by a lease option because you fail mortgage lenders requirement for an 'arms length' transaction. This means that you have no pre-existing relationship with the seller, which of course you do, by nature of your lease option contract.
So, you need Cash or the ability to get Bridging Finance to complete the purchase before refinancing onto a BTL mortgage.
Just thouugh worth posting for anyone who attends any of these courses as this is the one thing they never tell you!
The highest profile lease option guru was Rick Otton who was fined $18 Million, Rick Otton was the mentor of Ben Rogers, who went bankrupt after borrowing over £2million from within various wealth creation networks including Property Investor Network and Gill Fielding's networks where he was a lease options coach/mentor.
Thanks for sharing . When doing a LOA are you not supposed to have a deal that pays for itself ? For example you agree a fixed price to be paid in 5 years minus the option fee , minus the monthly payments made to the landlord during that period . If the deal stacks up that way you should be able to plan your purchase accordingly ?
Yes that's correct, but that's my point, they arn't deals that pay for themselves.
The income you generate won't give you enough cash to purchase the property for cash and you would be luckly if it would generate enough for a 25% BTL mortgage deposit. (which as said you couldn't get initially by default).
Just wanted to highlight the fact that you need to factor in having enough for the difference in cash which more realistically would be 80 - 90% of the option price or the ability to obtain bridging finance initially at that level to complete the transaction.
Most people being taught this strategy don't have the money (or ability to earn it) or assets to be able to bridge against during the option period. Being sold the dream of financial freedom through property with no or little money which in reality this strategy actual needs.
Ben Rogers never intended to buy the property so was not bothered about getting a mortgage.
His strategy ( for want of a better word) was to find a distressed seller, take out the lease option, then find a willing buyer. This would usually be someone who was having difficulty getting a deposit together or a mortgage.
He then puts the "buyer" into the house. The buyer pays a hefty deposit, usually a few grand, plus monthly rent, plus "super rent" of an extra £200 per month or thereabouts. Ben pays the mortgage out of the rent and pockets what's left, plus the super rent and the deposit.
After five years, the 60 payments of £200 would amount to £12000. The buyers think Ben has saved that as their deposit.
After five years the buyers try and get a mortgage. Ben has an agreed selling price so they need to be able to raise that amount from a new lender.
Ben takes that money, pays off the original loan, and gives the vendor a bung for cooperating and signing the title deeds over to the new buyer.
Ben takes the profit from the normal rent, plus the super rent, plus any money left over after the final transaction i.e. money from the buyers less the cost of paying off the original mortgage.
As far as I know, Ben never completed a single five year option arrangement with either a seller or buyer. All of the contracts had a null and void clause in the event of bankruptcy. When he went bankrupt, both sellers and buyers were left in limbo having lost the option to sell and the option to buy respectively. Sellers found themselves responsible for mortgages they had long since forgotten. Buyers found that the money they had given Ben towards a deposit was spent ( mostly on holidays), and the house they thought they were buying was about to be sold from under their feet.
Lease options on commercial property are an everyday accepted practice and work well.
But in the residential arena they are a recipe for disaster, except for the guru peddling them as a business strategy.
Rent to Rent is going to go the same way.