Options are versatile and powerful legal instruments which are changing the way residential property is bought, held and sold in the UK.
Put simply, options are written agreements that give the holder choice or freedom. Depending on the wording in the document, the owner gives exclusive freedom to buy, use or sell the property, or a combination of these freedoms. If the buyer chooses to buy whilst the option is in place, the seller must sell. That is the essence of an option.
Lease options are powerful tools, and to harness their magic we need a basic understanding of what they are and how they can work for us. It is important to have an idea of the essential elements needed to make options work:
Seven Essential Elements of Option Agreements
1) A willing seller
2) Property or land – the asset
3) A written agreement granting privileges
4) A consideration or option fee
5) An agreed purchase price
6) A time frame or term
7) A willing buyer
Let’s look at each in a little more detail.
1. A willing seller
So the seller must understand what they are doing, which means you must have explained it to them. One objection Wendy and I often get from investors starting out with options is “Why would any seller agree to this?” There are many reasons why sellers agree to grant terms and agree to your option offer, and we will discuss that in a later post.
2. Property or land – the asset
It goes without saying that there has to be something of value, something desirable, for an option to work. Be sure to do your due diligence and get necessary checks done before agreeing to any property or land option to ensure it has real value. One investor almost paid £5,000 for an option on a property the seller was claiming to own, but didn’t really!
3. A written agreement granting privileges
A written agreement is vital, not just verbal. Lease options are all about time and terms and time tends to change things so you need to make sure that things are clear from the start. It is important to protect your interests and that is why when agreeing lease options, everything should be down in plain English.
4. A consideration or option fee
This is what makes your written agreement legally binding, think of it as the stamp on your postcard. The option fee (or consideration) doesn’t need to break the bank, but it does need to be paid. It’s interesting that there is no minimum, but the consideration must be recognised in the UK as something of tangible value.
5 An agreed purchase price
The price you will eventually pay for the property needs to be clear and understood by all parties.
6. A time frame or term
According to English law, the maximum allowable term for an option is currently 21 years.
7. A willing buyer
This may be you if you find your dream house and decide to buy it using a lease option. It may be a tenant buyer you are working with. In any event, the buyer must understand and keep to the terms of the agreement – or the privilege to buy at an agreed price at a future date will be lost.
What Lease Options Are Not
Options are good medicine, but they are not a cure-all. They work best when used with care. Can they be used in circumstances where the seller is hugely in debt and is about to be repossessed after 12 months of deliberate non-payment? Yes, they could be used, but do you really think it would be in your best interest to take such a burden on?
We will be pleased to share our many years of experience with you and walk you through the process of finding the right seller for a lease option in other articles, but why not contact us to find out more about the help we can give to options investors?
In further articles we discuss:
- Purchase Options
- Lease Options
- Sandwich Options
- Cooperative Options
So now you have a good grasp of what lease options are and if you browse our site you will see how we can help you succeed with property options.