This is a relatively new strategy for residential property, although it has been used for many years in commercial property and property development. Basically, the seller agrees to lease the property now (so potential buyer doesn’t need the cash to buy it today) and then sell to buyer at future date at price agreed now. As property prices historically rise that means the future purchase will be at a discount to market price at that time.
A purchase option gives the buyer the right to purchase the property at a specific price within a certain timeframe. This option is normally created by a written agreement between the buyer and the seller. The buyer must pay an option fee to the seller, which is normally non-refundable. If the buyer decides to exercise the option, the option fee will be deducted from the final purchase price. If the buyer decides not to exercise the option, the option fee will be retained by the seller.
Purchase Lease Options (Rent to Purchase/Rent to Own)
A purchase lease option (rent to purchase) allows the buyer to rent the property for a period of time with the option to purchase the property at a specific price. This agreement is normally set for a fixed term and in some agreements the monthly rent payments will be credited towards the final purchase price. If the buyer decides not to purchase the property at the end of the rental period, the option to purchase will expire and the buyer will not be entitled to a refund.
Purchase options and purchase lease options (rent to purchase) allow the buyer to secure the property without having to pay the full purchase price upfront. This can be an advantage for buyers who do not have the cash available to purchase the property outright.
It may be of benefit to seller for example if they need to relocate, sales can take months to go through legals, this could be a faster option. It can also work well where the seller has little or no equity, so seller would probably leave them out of pocket.
Basically, this can be advantageous if the seller is in a hurry to sell but does not want to accept a lower price.
Predicting the future is difficult and the option price agreed now might produce a big discount for the buyer, losing out on the sale uplift is potentially a downside for the seller, there is a risk that the buyer may not exercise the option, leaving the property unsold.
Heads of Terms in the Contract
The heads of terms in the contract should include details such as
- Name and Address for both the buyer and seller
- Property address
- Agreed option fee which must be at least £1
- The amount for which the property can be purchased
- The length of the option period
- Monthly lease (if applicable)
- Any special terms and conditions
We recommend using a solicitor and taking legal advice Purchase Lease Option Solicitors | Bonallack & Bishop Solicitors (bishopslaw.co.uk)
Things to Check and what to say to vendors
Buyers should check if the mortgage lender will consent to letting the property as this may affect the agreement. Additionally, buyers should check the cost of the option and the typical length of the option period.
Typical Length of Option Period:
The typical length of the option period is between 3 to 5 years.
What to Say to Property Owners:
When approaching property owners, buyers should ask if the vendor would be interested in renting on a long-term let for between 3 to 5 years and if they would be interested in selling the property to them in the future.
In conclusion, purchase options and purchase lease options (rent to purchase) can be advantageous for both buyers and sellers. Buyers can secure the property without having to pay the full purchase price upfront, and sellers can secure a buyer without having to sell the property outright. It is important to have a written agreement in place and to ensure that both parties understand the agreement.