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Options Homework
This piece is a ‘lesson to self’ I have written to help me clarify, absorb and further my understanding of options. By sharing it, I thought any subsequent comments might be of benefit to the community. I have no property based options experience so would appreciate others thoughts on whether or not it ‘makes sense’ to them. It is not meant to be a complete guide but more of a ‘heads up’ for those interested.
Option agreements give us control over a property without purchasing that property. The rights afforded to the holder of a property option are comparable to those of a call option found in the financial markets: They offer the holder the right but not the obligation to purchase a property at a fixed price on or before a specified date. The individual terms of an option are at the prerogative of the seller and can be structured in any number of ways. With options all rights lie with the buyer while all obligations fall on the seller.
For an option agreement to be enforceable under English law its purpose and contractual conditions must be clearly stated and a consideration must pass from the buyer to the seller. If the option is exercised – via an option notice - then the seller is contractually obligated to sell as per the terms of the agreement. If the option is not exercised within the time specified the option will expire and the seller may keep the initial option fee.
The reduced liquidity in the credit markets and the strict criteria imposed by lenders has resulted in property investors seeking alternative means to grow their portfolios. Options are put forward as an attractive solution to these problems because the financial commitment is low and there is no requirement on the investor to pass a credit check. The attractiveness of a property option over a financial option - where the price is governed by complex mathematical models - is that the option to buy price can be favourably negotiated by the investor. This means you can offer as much or as little as you wish - even £1.
The ‘multitude’ of creative set-ups and contractual variations possible with options makes them the ideal tool for today’s liquidity starved investor who wants to continue expanding his business. Popular creative uses include:
• Purchase Options (Option to Buy): used to profit, protect and facilitate transactions in Ready Made, No Money Down and Property (or Land) deals.
• Lease Options (Rent to Buy or Rent to Own): ideal for the investor looking to benefit from an upfront premium, improved cashflow, known backend and a tenant ‘homeowner’ mindset.
• Sandwich Options: a combination of the previous two and perfect for the poor credit rated investor looking to profit without having to purchase a property.
Some of the ‘many’ option clauses in common use include:
• Terminating an option if the terms of a tenancy are broken.
• Permission for tenant buyer to work on a property subject to the owner’s consent.
• Extension of the option period for a fee.
• Incremental annual price increases.
• Permission to assign right to buy on to a third party.
Whenever an investor enters into an ‘option to buy’ contract he should consider protecting himself by placing a restriction on the land registry via an RX1 form. The purpose of this form is to alert the investor if a property is being sold without his prior consent. Entering a restriction is optional and largely depends on how an investor views a particular situation. He may think pursuing a financially distressed young family through the courts is unethical while enforcing an agreement with a canny landowner, acceptable.
The three sections below provide a description of how a particular option works followed by an example, comments that I think are particularly relevant and finally a list of some the most relevant paperwork required for each transaction. Although the paperwork can be purchased over the internet I think it is far easier, and safer, to instruct a competent options solicitor from the outset who will ‘provide and guide’ you through the documents. To protect all parties, option agreements must be suitably witnessed.
Purchase Option: The holder of a purchase option is looking to gain from any financial uplift in value created during the time he holds the option.
• Investor negotiates to pay £500 to a vendor for a 1 year option on a piece of land currently valued at £100K.
• Investor protects his interest via a restriction on the land registry using an RX1 form.
• He then submits plans with a view to increasing the value the land.
• He wins planning permission which increases the land value to £140K.
• Then he either exercises his option and takes possession or sells the option onto a third party for £140K, making him a £40K profit. (Ex. Transaction costs)
The land example above is one of the simplest ways to profit with options and is easily adapted to property. You negotiate an option on a property at one price and then assign (sell) it onto a third party for a profit.
Paperwork: Option to Buy, Purchase Agreement.
Lease Option: This is actually a combination of two documents, an AST (lease) and an option contract.
This scheme gives tenants - currently unable to buy - the right to purchase a property on or before the date specified in the option. The scheme is aimed at tenants who want to buy but cannot (possibly) down to poor credit, insufficient tax records or recent immigration. The tenant buyers exercise price is dependant on the investor and how he reads the future movement of the market. Opportunities for profit come from any mix of the initial upfront fee, monthly credits or - most profitably - at the ‘backend’ when the tenant buyer exercises their option.
• Investor buys property for £60K.
• Investor finds a tenant willing to lease this property for 2 years with an option to buy at £80K; pay £4K upfront fee and a monthly credit of £200, both of which will go towards their deposit.
• After 2 years tenant buyer exercises their option and buys the property for the agreed £80K.
• Investor returns £8.8K to the tenant buyer for their deposit. (24 months x 200 = 4800 + 4000 fee = 8800)
• Investor’s final cash position £20K. (Tenant Exercise Price – Investor Purchase Price)
Possible complications with lease options include:
• Repossession, where an investor cannot pay their mortgage because their tenant buyer stops paying rent.
• Convincing a tenant buyer to agree to an exercise price in a falling market.
• Not ‘clearly’ structuring the collection of future deposit monies so there are ‘proof of funds’ issues, for the tenant buyer, later.
The investor chooses whether to put any upfront fee or monthly credit towards the tenant buyer’s future deposit or, instead, looks at it as a ‘cost of doing business’. Due to the potential ‘proof of funds’ issues mentioned previously, investors will need to put in place a method which clearly shows that the funds come from the tenant buyer. The simplest method to use would be to keep a clear auditable trail of your tenant’s payments in your records. Probably more acceptable to lenders, would be to deposit the funds in your letting company account under the name of your tenant buyer or to open up a joint account in yours and the tenants name.
Paperwork: Tenant Option, AST, Head of Terms.
Sandwich Option: This is when an investor enters into an ‘option to buy’ agreement with a vendor to buy a property which he then offers to a tenant buyer on a lease option. Depending on how the agreement is set up and ignoring incidental costs - the investor will assume responsibility for the vendor’s mortgage or contract to pay them rental.
The investor looks to profit in the same way as with a straight lease option except this time his ‘backend’ profit is paid by the vendor - as per the investor’s ‘option to buy’ agreement - when the vendor sells to the tenant buyer.
• Investor pays vendor £1 for an ‘option to buy’ property for £100K over a 4 year period.
• Investor protects his interest via a restriction on the land registry using an RX1 form.
• Investor finds a tenant who agrees to: a 3 year lease option at £120K; a non-refundable upfront fee of £3K and a monthly amount credited towards their deposit of £350.
• After 3 years the tenant exercises their option and buys the property directly from the vendor for £120K.
• Investor returns £12.6K to the tenant buyer to go towards their deposit. (36 months x 350 = 12600)
• Vendor passes £20K profit back to the investor as per their original agreement. (Tenant Exercise Price – Investor Exercise Price = Backend Profit)
• Investor’s final cash position £23K. (Option Fee + Backend Profit)
The investor will have to carefully manage the extra paperwork needed to set up a sandwich option if he wishes to take full control of the vendor’s mortgage, insurance etc. during the length of the option. As well as the requirements listed above for a purchase and lease option an investor will also need to arrange letters of authority, lenders ‘consent to let’, vendors redemption/mortgage statements and an ‘option to buy’ for himself. Alternatively, the investor can bypass most of this and, instead, enter into a rental agreement with the vendor.
In addition to the complications listed in the lease option section above, an investor needs to thoroughly check the vendor’s financial position to see if a remortgage is due or for signs of possible bankruptcy. If bankruptcy does happen then the investor will need to return any deposit money held on behalf of their tenant buyer as the official receiver will almost certainly void an option agreement. Thoroughly checking the vendor’s financial position when you first set up an agreement will hopefully highlight any possible future problems.
Paperwork: Investor Option, Tenant Option, AST, Head of Terms, Letters of Authority, RX1, Purchase Agreement.
The limited availability of funds for both investors and the public - coupled with the level of interest in the property community - undoubtedly means that options are here to stay. I think the main obstacle investors need to overcome is in convincing a ‘resistant to change’ general public that options are a viable alternative to a traditional house sale. The biggest downside I can see with options is the lost capital appreciation benefits of a long term buy and hold strategy. Therefore, rather than look at options as a stand alone business, I would view them as a cashflow enhancing tool that perfectly compliments an investors existing business.
For anyone interested in a more in depth exploration of options I would recommend material by: The Sophisticated Investor, Lisa Orme and Wendy Patton. (American based)
Option agreements give us control over a property without purchasing that property. The rights afforded to the holder of a property option are comparable to those of a call option found in the financial markets: They offer the holder the right but not the obligation to purchase a property at a fixed price on or before a specified date. The individual terms of an option are at the prerogative of the seller and can be structured in any number of ways. With options all rights lie with the buyer while all obligations fall on the seller.
For an option agreement to be enforceable under English law its purpose and contractual conditions must be clearly stated and a consideration must pass from the buyer to the seller. If the option is exercised – via an option notice - then the seller is contractually obligated to sell as per the terms of the agreement. If the option is not exercised within the time specified the option will expire and the seller may keep the initial option fee.
The reduced liquidity in the credit markets and the strict criteria imposed by lenders has resulted in property investors seeking alternative means to grow their portfolios. Options are put forward as an attractive solution to these problems because the financial commitment is low and there is no requirement on the investor to pass a credit check. The attractiveness of a property option over a financial option - where the price is governed by complex mathematical models - is that the option to buy price can be favourably negotiated by the investor. This means you can offer as much or as little as you wish - even £1.
The ‘multitude’ of creative set-ups and contractual variations possible with options makes them the ideal tool for today’s liquidity starved investor who wants to continue expanding his business. Popular creative uses include:
• Purchase Options (Option to Buy): used to profit, protect and facilitate transactions in Ready Made, No Money Down and Property (or Land) deals.
• Lease Options (Rent to Buy or Rent to Own): ideal for the investor looking to benefit from an upfront premium, improved cashflow, known backend and a tenant ‘homeowner’ mindset.
• Sandwich Options: a combination of the previous two and perfect for the poor credit rated investor looking to profit without having to purchase a property.
Some of the ‘many’ option clauses in common use include:
• Terminating an option if the terms of a tenancy are broken.
• Permission for tenant buyer to work on a property subject to the owner’s consent.
• Extension of the option period for a fee.
• Incremental annual price increases.
• Permission to assign right to buy on to a third party.
Whenever an investor enters into an ‘option to buy’ contract he should consider protecting himself by placing a restriction on the land registry via an RX1 form. The purpose of this form is to alert the investor if a property is being sold without his prior consent. Entering a restriction is optional and largely depends on how an investor views a particular situation. He may think pursuing a financially distressed young family through the courts is unethical while enforcing an agreement with a canny landowner, acceptable.
The three sections below provide a description of how a particular option works followed by an example, comments that I think are particularly relevant and finally a list of some the most relevant paperwork required for each transaction. Although the paperwork can be purchased over the internet I think it is far easier, and safer, to instruct a competent options solicitor from the outset who will ‘provide and guide’ you through the documents. To protect all parties, option agreements must be suitably witnessed.
Purchase Option: The holder of a purchase option is looking to gain from any financial uplift in value created during the time he holds the option.
• Investor negotiates to pay £500 to a vendor for a 1 year option on a piece of land currently valued at £100K.
• Investor protects his interest via a restriction on the land registry using an RX1 form.
• He then submits plans with a view to increasing the value the land.
• He wins planning permission which increases the land value to £140K.
• Then he either exercises his option and takes possession or sells the option onto a third party for £140K, making him a £40K profit. (Ex. Transaction costs)
The land example above is one of the simplest ways to profit with options and is easily adapted to property. You negotiate an option on a property at one price and then assign (sell) it onto a third party for a profit.
Paperwork: Option to Buy, Purchase Agreement.
Lease Option: This is actually a combination of two documents, an AST (lease) and an option contract.
This scheme gives tenants - currently unable to buy - the right to purchase a property on or before the date specified in the option. The scheme is aimed at tenants who want to buy but cannot (possibly) down to poor credit, insufficient tax records or recent immigration. The tenant buyers exercise price is dependant on the investor and how he reads the future movement of the market. Opportunities for profit come from any mix of the initial upfront fee, monthly credits or - most profitably - at the ‘backend’ when the tenant buyer exercises their option.
• Investor buys property for £60K.
• Investor finds a tenant willing to lease this property for 2 years with an option to buy at £80K; pay £4K upfront fee and a monthly credit of £200, both of which will go towards their deposit.
• After 2 years tenant buyer exercises their option and buys the property for the agreed £80K.
• Investor returns £8.8K to the tenant buyer for their deposit. (24 months x 200 = 4800 + 4000 fee = 8800)
• Investor’s final cash position £20K. (Tenant Exercise Price – Investor Purchase Price)
Possible complications with lease options include:
• Repossession, where an investor cannot pay their mortgage because their tenant buyer stops paying rent.
• Convincing a tenant buyer to agree to an exercise price in a falling market.
• Not ‘clearly’ structuring the collection of future deposit monies so there are ‘proof of funds’ issues, for the tenant buyer, later.
The investor chooses whether to put any upfront fee or monthly credit towards the tenant buyer’s future deposit or, instead, looks at it as a ‘cost of doing business’. Due to the potential ‘proof of funds’ issues mentioned previously, investors will need to put in place a method which clearly shows that the funds come from the tenant buyer. The simplest method to use would be to keep a clear auditable trail of your tenant’s payments in your records. Probably more acceptable to lenders, would be to deposit the funds in your letting company account under the name of your tenant buyer or to open up a joint account in yours and the tenants name.
Paperwork: Tenant Option, AST, Head of Terms.
Sandwich Option: This is when an investor enters into an ‘option to buy’ agreement with a vendor to buy a property which he then offers to a tenant buyer on a lease option. Depending on how the agreement is set up and ignoring incidental costs - the investor will assume responsibility for the vendor’s mortgage or contract to pay them rental.
The investor looks to profit in the same way as with a straight lease option except this time his ‘backend’ profit is paid by the vendor - as per the investor’s ‘option to buy’ agreement - when the vendor sells to the tenant buyer.
• Investor pays vendor £1 for an ‘option to buy’ property for £100K over a 4 year period.
• Investor protects his interest via a restriction on the land registry using an RX1 form.
• Investor finds a tenant who agrees to: a 3 year lease option at £120K; a non-refundable upfront fee of £3K and a monthly amount credited towards their deposit of £350.
• After 3 years the tenant exercises their option and buys the property directly from the vendor for £120K.
• Investor returns £12.6K to the tenant buyer to go towards their deposit. (36 months x 350 = 12600)
• Vendor passes £20K profit back to the investor as per their original agreement. (Tenant Exercise Price – Investor Exercise Price = Backend Profit)
• Investor’s final cash position £23K. (Option Fee + Backend Profit)
The investor will have to carefully manage the extra paperwork needed to set up a sandwich option if he wishes to take full control of the vendor’s mortgage, insurance etc. during the length of the option. As well as the requirements listed above for a purchase and lease option an investor will also need to arrange letters of authority, lenders ‘consent to let’, vendors redemption/mortgage statements and an ‘option to buy’ for himself. Alternatively, the investor can bypass most of this and, instead, enter into a rental agreement with the vendor.
In addition to the complications listed in the lease option section above, an investor needs to thoroughly check the vendor’s financial position to see if a remortgage is due or for signs of possible bankruptcy. If bankruptcy does happen then the investor will need to return any deposit money held on behalf of their tenant buyer as the official receiver will almost certainly void an option agreement. Thoroughly checking the vendor’s financial position when you first set up an agreement will hopefully highlight any possible future problems.
Paperwork: Investor Option, Tenant Option, AST, Head of Terms, Letters of Authority, RX1, Purchase Agreement.
The limited availability of funds for both investors and the public - coupled with the level of interest in the property community - undoubtedly means that options are here to stay. I think the main obstacle investors need to overcome is in convincing a ‘resistant to change’ general public that options are a viable alternative to a traditional house sale. The biggest downside I can see with options is the lost capital appreciation benefits of a long term buy and hold strategy. Therefore, rather than look at options as a stand alone business, I would view them as a cashflow enhancing tool that perfectly compliments an investors existing business.
For anyone interested in a more in depth exploration of options I would recommend material by: The Sophisticated Investor, Lisa Orme and Wendy Patton. (American based)
Replies to This Discussion
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Permalink Reply by Vanessa on -
Hi Marcus,
Well written piece. Well done! Yes, I agree options are definitely a way forward in these challenging financial conditions and they can often offer a win-win situation.
Where did you learn this info? Have you been on the Rick Otten course by any chance?
Options are something that I am looking into myself at the moment with the help of John Corey, who is an expert on this subject.
I am concerned though that it is one of these things that sounds great in theory, but is very hard to pull off in practice.
If you are going to be doing some lease options, perhaps you would be so kind as to start a "diary" of your journey to completing on a lease option?. Set up a discussion specifically to document your deals - from how you found them to how they work in reality.
I know that I, for one, would be very interested. It would make a great blog too!
Respect again for taking the trouble to write such a detailed and helpful piece. You are a credit to Property Tribes and we are delighted to have your contributions!
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Permalink Reply by Marcus on -
Vanessa said:Where did you learn this info? Have you been on the Rick Otten course by any chance?
Several years ago I had a short flirtation with the financial markets - via my own account - so I already have a basic understanding of what constitutes an option. My learning to date has been studying the Wendy Patton book, The Sophisticated Investor course book, Invisible mentors and diligently playing Sherlock over the internet.
The Wendy Patton book is good but contains information not relevant to us as it’s aimed at the American market, The Sophisticated Investor course book offers a far more detailed and relevant discussion of options use in the UK, and finally, the Invisible mentor/ internet route covers everything - and more – but in a ‘drip feed’ sort of way.
It was ‘a pain’ writing this because I had to streamline it so much. A fair bit of the detail - I deemed less relevant - is missing as I didn’t want to bore the pants off the community. I am going to write up ‘all inclusive’ version I can use as a reference so would appreciate the advice of others as to what they think I should include in it. I would also like confirmation what paperwork others use – I have left out several docs that I deemed ‘less relevant’.
Thanks.
PS: Never done an Otten.
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Permalink Reply by REI on -
Marcus,
A long post with a number of good points.
I would do some deals (most deals?) slightly differently as I see some of the risks differently than you do. Splitting hairs rather than a major concern with the advice above.
Thanks for sharing the info with the Tribe.
John Corey
www.ChelseaPrivateEquity.com/blog
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Permalink Reply by Marcus on
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REI said:I would do some deals (most deals?) slightly differently as I see some of the risks differently than you do. Splitting hairs rather than a major concern with the advice above.
Feel free to split hairs. The idea behind sharing this was to further my understanding using the contributions of others, so I would be interested in your thoughts on deals and risk – even bullet points I can investigate would help.
Maybe the length of the opening post has resulted in people falling asleep before they reach the end…if so, then I’ll have to accept it’s going to be a ‘tumbleweeds thread’.
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Permalink Reply by LisaOrme on -
Excellent work Marcus.
I'm doing two talks in next few weeks on Options etc - I know V wants to keep the forum promo free so I won't post where but you'll be able to find me.
Anyway, I was going to say I can just sit and sip Pina Coladas all night instead and you can do it ;-)
John and I are very much on the same page with these in that they are just one strategy, a tool in your tool bag to be used when the right circumstances warrant it. My worry is that people are running around with these documents like they’re some sort of holy grail signing up people willy nilly with no real thought just because they can and we will see these go the same way as sale and rent back if we aren’t careful.
My talks will very much focus on some of the danger issues of doing these and how they can and do go wrong as well as the benefits.
Brilliant, brilliant tool in the right place but not as many are using them.
Happy to answer any q’s from anyone on these.
KR, Lisa
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Permalink Reply by Vanessa on
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Hi Lisa,
Just to say that you would be most welcome to post your events here in the Events section. That's what it is for! I did send you an email inviting you to do that and to post your blog on here. I also commented on your blog. Not sure if you saw it or not?
Thank you for bringing your vast experience of options to the PT forum.
V.
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Permalink Reply by Richard Francis on -
Hi Marcus,
I may be in danger of asking tonight's dumb question - but all your examples are based on land and property values rising. It's not beyond the realms of possibility that any price that you fix/agree now may further fall in next 24-36 months (if all the gloom is to be believed). What happens if it does?
Thanks - Richard
Vanessa said:Hi Lisa,
Just to say that you would be most welcome to post your events here in the Events section. That's what it is for! I did send you an email inviting you to do that and to post your blog on here. I also commented on your blog. Not sure if you saw it or not?
Thank you for bringing your vast experience of options to the PT forum.
V.
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Permalink Reply by Marcus on
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Thank you all for taking the time to comment, I am very grateful.
Lisa, completely agree with this being only one tool in the investor’s toolbag and again with your concerns around the dangers. Most, if not all, of the online promotion seems to centre on the positive aspects of options without considering the negatives.
Positives:
• No credit check for both the investor and the tenant buyer.
• Very low capital investment for investor and tenant buyer.
• Low initial deposit for tenant buyer compared to mortgage.
• Less initial fees for tenant buyer when compared to a mortgage.
• No obligation to purchase if property value falls below option strike price.
• If prices increase above the strike price you get to buy a property BMV. This is truly a biggie as the leverage with options is not capped.
• Landlord can put responsibility for repairs onto tenant buyer.
Negatives:
• Generally having to pay a larger upfront fee when compared to renting.
• A landlord will put responsibility for repairs onto the tenant buyer during the option period.
• The tenant buyer may lose all payments towards their end deposit if they break the terms of their agreement – at the discretion of the investor.
• The tenant buyer may lose all payments towards their end deposit if property values fall and they don’t exercise their option.
• Lenders will need to accept the landlord’s method of returning monies for the tenant buyers deposit in the future.
• Tenant buyers agreement will almost certainly be void if landlord goes bust.
• Tenant buyers agreement will almost certainly be void if original vendor goes bust when doing a sandwich option.
• No guarantee that the tenant buyer will be able to secure a mortgage in the future.
• Landlords enforcing agreements on vulnerable tenants.
This is just a list of the pro’s and con’s I was able to rattle off without thinking so I would be grateful for any other suggestions – funny how I naturally listed more negatives!
When compared to the SARB, I agree, the options industry looks open abuse. How many tenant buyers understand the small print of the agreements they are signing and will investors actually bother explaining it to them? I have read elsewhere that the FSA will look into the options market once the SARB regulations are up and running. Any thoughts?
Are there any other obvious uses for options that I have missed that I should be aware of?
What is the minimal amount of paperwork you use when first setting up an option?
Richard, I agree with your thoughts completely. The promoters bypass this concern by saying that the option holder will not be obligated to buy a property if it has fallen in value. Sounds good until you consider the tenant buyer on a lease option who has diligently been contributing towards their deposit but now faces losing all their money – surely that’s not ethical? (Can be avoided by setting favourable terms to start with.)
Thanks again.
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Permalink Reply by LisaOrme on
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Hi V,
Many thanks will add them in. Yes thanks, I replied to your comment on my blog - check it out!
Hi Richard,
Ultimately as Marcus said there is no obligation on the BUYER to buy so if property prices do fall further they do not have to buy. However the seller is obligated to sell though obligation and getting them to do it are two different things. There are many people who have secured options (paid an option fee or paid off debts to the tune of many thousands) and then the seller has disappeared off the face of the planet. It’s very hard to force a sale through when the seller refuses to play ball! I have seen use of irrevocable powers of attorney but these make me very nervous. The reason being in all honesty any independent solicitor worth their salt would never recommend their client sign one of these in such circumstances so if clients are signing them my fear is they are doing it without the advice of a (independant) solicitor and I would strongly advise against this.
Hi Marcus,
Good list though a concern I have is the maintenance issue. Landlords in the UK are responsible for maintenance, repairs etc as laid down by the L&T and various other legislation. This is not America and it is not Australia where the rules are quite different and again I have major concerns about tenants being given responsibilities for maintenance and repairs and even major improvements. Anything to do with plumbing, electrics or the building structure should never be the responsibility of the tenants and that doesn’t leave much else to be honest! Take it from one who knows – I turned up at one of my lease options and they had removed a supporting wall!! And my documents clearly state they are NOT to do anything of this nature! I am very concerned as to what is being passed onto tenants in order for the landlord to divest themselves of such responsibilities and costs.
It is the structure of the deals that leads to the biggest issues and the fact so many are doing them now because of the marketplace. I wonder as and when prices pick up if an option has been secured on a property worth £150k for £110k how many landlords will allow the option to be exercised? The thought scares me quite frankly – we have seen ruthless behaviour in property many times over and I expect to see it again.
Another example is that the option price is meant to be achievable and as has been said I believe many (I have seen the proof) are overpricing the properties – some naively in the belief the growth will come soon but others deliberately meaning that the tenants can’t buy within the option period. This is the area that bothers me most and is where I can see FSA etc stepping in. If a tenant has paid a couple of grand deposit and an additional £150 a month towards the property purchase price and given a two year option at 120k on a property currently worth 95k I think they would have a fair case to say that that is unachievable – see you in court!!!
KR, Lisa
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Permalink Reply by Marcus on
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Lisa, several of the issues you raise are new to me so thanks for that. That’s exactly what I was hoping for from the thread.
Considering your points, I think investors should look at ways of setting these up so their number one priority is to protect the interests of their tenant buyer. Adopting this approach now will hopefully put them ahead of the game where any future regulations are concerned. Chewing the cud:
• Any money to go towards the eventual deposit to be held in accounts with the tenant buyer’s name attached.
• In the event of a tenant not exercising their option, then all monies paid thus far should be returned.
• Landlord should be responsible for maintenance throughout the option period.
• No agreement should be entered into unless the tenant buyer has been given independent legal advice.
• Base the eventual selling price on a percentage above some objective measure – not sure what?
If regulation does come in then I would have thought the powers that be would adopt a protected scheme similar to the rental deposit schemes now in force – long way off and don’t know if that makes sense but worth considering.
The best mindset for an investor, I think, would be to look at it as a normal tenancy that just happens to provide additional cashflow for a fixed period of time. This additional cashflow should be saved independently of other funds as it may, or may not, need to be returned at some point.
It would be interesting to know whether individual investors actually consider what’s ethically best for their clients or whether they just blindly follow the herd.
Best wishes as always
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Permalink Reply by REI on
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Marcus,
You are starting to head in the wrong direction.
1. Lisa noted that repairs and maintenance stay with the landlord (the owner). This is clear in the statues. It is also clear in the US no matter what the gurus want to claim. Landlords are paid for providing a habitable home and it has to stay that way if you want to collect the rent.
2. I am not a fan of thinking of the option money as a refundable deposit. The money paid to start an option is money that legally belongs to the seller of the option as soon as it is paid. It might be a credit towards the future purchase. That is not a requirement. It clearly is not a pot of money that is being held as a refundable deposit.
3. Legally we are not talking about a deposit that is in anyway protected. It might be argued that the tenant has an equitable interest in the property but lets no go there unless we have a legal advisory available to explain that aspect of the law.
A lease with an option to buy is not a simple AST plus a savings account. If the tenant really wants a savings account let them just rent and they can manage their own savings account. As the owner of a property who has issued an option you have impaired the value of your asset until that option is exercised or the option expires. You are paid consideration (something of value) for giving up some of your rights to your property. Until you sell you do not even know how the option consideration should be treated for tax purposes. Income (option expires with no sale) or as part of the payment for the property sold with all the normal calculations to figure out the tax impact of the sale.
John Corey
www.ChelseaPrivateEquity.com/blog
Marcus said:Lisa, several of the issues you raise are new to me so thanks for that. That’s exactly what I was hoping for from the thread.
Considering your points, I think investors should look at ways of setting these up so their number one priority is to protect the interests of their tenant buyer. Adopting this approach now will hopefully put them ahead of the game where any future regulations are concerned. Chewing the cud:
• Any money to go towards the eventual deposit to be held in accounts with the tenant buyer’s name attached.
• In the event of a tenant not exercising their option, then all monies paid thus far should be returned.
• Landlord should be responsible for maintenance throughout the option period.
• No agreement should be entered into unless the tenant buyer has been given independent legal advice.
• Base the eventual selling price on a percentage above some objective measure – not sure what?
If regulation does come in then I would have thought the powers that be would adopt a protected scheme similar to the rental deposit schemes now in force – long way off and don’t know if that makes sense but worth considering.
The best mindset for an investor, I think, would be to look at it as a normal tenancy that just happens to provide additional cash-flow for a fixed period of time. This additional cash-flow should be saved independently of other funds as it may, or may not, need to be returned at some point.
It would be interesting to know whether individual investors actually consider what’s ethically best for their clients or whether they just blindly follow the herd.
Best wishes as always
About
Events
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Berkshire Property Meet II - Jan 21st with Rohan Weerasinghe
January 21, 2010 from 6:45pm to 9:45pm – Holiday Inn Maidenhead
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