Lease Option Agreements – How to Recognise if there’s money in the deal | Dave O’Hara


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When you have put out lots of yellow letters to your target houses, you’ll soon start to get phone calls (well, hopefully you will if you’ve written a good letter). Quick tip – get yourself a dedicated phone to allow people to ring you. Don’t use your normal phone number. If the phone rings, don’t pick up. Chances are you’ll be doing something else and won’t be prepared for the phone call. Let it go to voicemail and then call back. Sometimes the caller leaves a message and sometimes they’ll drop you a text telling you which house they’re ringing about. This is all good info. Ring back when you’re comfortable and have all of your gear to hand (pen, pro-forma, script). Find a comfortable place to do it from. In the recent hot weather I’ve been using the garden as my office.

Run through your script and make sure you ask all your questions, but try not to make it sound like a list. Try to strike up a conversation and work the questions into it. This way, the vendor won’t feel uncomfortable. You’ll find it easier too. Sometimes the owner will be enthusiastically helpful, they’ll tell you all kinds of things in addition to the questions you want answers to. Sometimes you’ll get short answers and they’ll not go into any financials. I always say that without knowing all the facts it will be impossible to make them an offer. Sometimes that persuades them, sometimes not,
but when you’ve gathered everything you need to know, tell them you’ll go away and do some number crunching, then get back to them.

When you are first starting out with Lease Options, like we were a few months ago, you’ll not realise whether there’s anything in it for you as you fill in the forms. After a while, you instinctively recognise when a house is a possible lease option and there’s going to be a good positive cash flow if the owner takes up the deal. Try to get £250 positive cash flow each month if possible. Here are a few examples of the types of situations we’ve discovered.

A good opportunity – money in the deal for both parties

House for sale price : £70,000 (reduced from £80,000)
Mortgage : none
Reason for selling : Moving in with someone else
Wants to be a landlord? : No
Needs the money? : No, more interested in income
Likely monthly bills : £200 (council tax, gas/electricity, insurance, water)
Rental in area : £550 pcm

In this example, the fact the owner has no mortgage is a good thing because it gives you the latitude to pay them a good monthly amount, whilst still having a decent positive cashflow for yourself in the deal. It’s necessary to compute a likely term for your lease option. This depends on the rental value and the purchase price.

Now for a bit of maths. Decide what you purchase price will be. To give the owner an incentive, that would have to be £70,000 or more, so I always find out if the house has been reduced and by how much, then if that price seems reasonable, i’d offer them more.
The house is currently for sale at £70k, but i’d tell the seller that I could offer them £80k (the price before the property was reduced), but i’d need time to pay it.

An £80k house will need a £20k deposit for a BTL mortgage, so the next thing you need to do is calculate how long it’s going to take for the rental you intend to make on the property to add up to £20k. If you get £550 ppm in rental, a good offer would be £200 each and every month to the vendor. That would leave £350 to save for the mortgage, plus to pay for any monthly fees you may have. Let’s say that leaves you with £250 per month.

£20,000 / £250 = 80 payments.

This means it’ll take you just shy of 7 years to save your deposit. So your offer to the seller could be :

Lease Option Offer
Offer £56,000 [OR]

Option to buy the house in 7 years for £80,000
In the meantime, they’ll be paid £200 pcm until then

In 7 years you’ll have enough to get a BTL mortgage on the property, without using any of your own money! In the meantime, you’ll control the property and be bringing in £350 pcm from it for 7 years. The seller will be £350 pcm better off (no bills + your payment). Of course, all of this is negotiable and if the seller wants a higher price, you’ll need a longer term, and conversely, the sooner the seller wants his money, the lower the price you’ll pay.

You could also structure the deal so that the owner is paid more per month, but this will reduce the final purchase price after the option period. If the owner is paid £500 pcm then calculate how that extra payment reduces the final buy price.

A bad opportunity – no money in the deal for you

House for sale price : £70,000 (reduced from £80,000)
Mortgage : £65,000 remaining. Repayment mortgage (£450 pcm)
Reason for selling : Moving to a bigger house
Wants to be a landlord? : No
Needs the money? : Yes
Likely monthly bills : £200 (council tax, gas/electricity, insurance, water)
Rental in area : £400 pcm

The vendor wants to sell, but there’s no cashflow in the deal for you. Even if you rented out the house at the local rental rate, you wouldn’t be covering the mortgage payment. In addition, you wouldn’t be able to offer the vendor that lucrative income either. He would be better off by not having to pay the bills, but there’d be no money to save for your BTL mortgage after the period of the lease, so there’s no lease option offer that could be made. In this case, the owner has also said he needs the money immediately.

Offer
Cash Offer £56,000

As this offer is £9k less than the vendor owes on his mortgage, he’s unlikely to accept (unless you’re VERY lucky). At only £400 pcm available in rent in the area, the yield would also be on the low side when you rented it out.


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