A Lease Option sale - also known as a Purchase Lease Option or PLO - is occasionally grouped in with other Assisted Sale options, but is sometimes considered to be a separate approach entirely.
For the purposes of this guide, however, and due to the many similarities between the different methods, we have chosen to include this option.
A Lease Option is very similar to an AS with cash advance, but the process tends to take longer than 12 months to complete. The final sale date that is pre-agreed as part of the contract is often between three and five years in the future, though, by law, this can reach up to 18 years.
As is the case in the method detailed above, this contract will be enforceable by law as long as money changes hands - even if it is as little as £1. In completing a transaction of this kind, the buyer will be purchasing the option to buy the property.
It is worth noting that the word “option” means exactly that. A contract of this kind means that the buyer is not legally obligated to go through with the purchase, but that they have the exclusive right to do so at the end of the specified period.
When entering into an agreement of this kind, the seller and the buyer will confirm a “strike price” (or “exercise price”), which is a fixed amount for which the seller may purchase the property before the option period draws to a close.
As in an AS, once this agreement is in place, the buyer (or the “option holder”) takes control of the property according to the terms of the contract - including mortgage payments, bills and maintenance costs.
A Lease Option often sees the seller receiving monthly “rental payments” from the buyer as opposed to being paid a portion of the home’s equity in advance. These payments will be made throughout the period stipulated in the contract.
Often, the buyer may rent out the property to an “undertenant” in order to make a profit during the option period.
As we have mentioned, when it comes to the eventual sale, the buyer reserves the right to change their mind.
For this reason, the possibility remains that they will not take on full ownership of the property at the end of the pre-agreed term. If this is the case, the option will expire, permitting anyone to make an offer on the property from that point onwards.
Of course, it is still possible for the seller and buyer to draw up a new contract with revised terms and start afresh after the previous one has expired.
Benefits of a Lease option
As we have mentioned, a process of this kind usually sees the buyer taking on responsibility for all expenses relating to the property. They often pay a regular rental fee on top of this, which is certainly financially beneficial to the seller.
It is also up to the buyer to undertake any planned renovations, which means that the seller can part with their property and make money in return without having to make any improvements themselves.
Furthermore, in many cases, investors who purchase property via a Lease Option go on to let that same property out to its original owners, generating an ongoing income.
Who Might Prefer a Lease Option
This method of sale may prove beneficial to certain individuals - particularly those in mortgage arrears or who cannot manage the property’s upkeep, as these responsibilities will then fall upon the shoulders of the new owner.
Some contracts allow for any profit made from the eventual sale to be shared with the original seller, which makes them especially attractive.
Who Should Avoid This Option?
Lease Options can be complex. You may decide to avoid this type of sale if any of the following issues are of particular concern to you.
Any seller agreeing to a Lease Option must face the risks in pre-agreeing a fixed sale price at a point in the future.
As house prices may rise or fall throughout the period covered by the contract, the seller may find themselves parting with their property for a lower amount than they could have achieved by selling on the open market.
However, conversely, property prices in the area - or indeed, nationally or globally - may have taken something of a hit during this time. In a situation of this kind, a pre-agreed fixed price may prove beneficial to the seller.
Another risk is that, as previously mentioned, the buyer will only be purchasing the “option” to take on ownership of the property. As a result, this is not an assured sale.
If the buyer decides that it is not in their best interest to take full ownership of the property - for example, if house prices fall too far for them to make a profit - they can simply walk away from the arrangement.
For this reason, it is important for sellers to pay close attention to any “break clauses” that are included in the Lease Option contract.
Under some contractual terms, it is also possible for the buyer to sell the option to a third party before the end of the period specified in the contract.
While the original contract will remain in place if this happens, it means that the property will not be taken on by the seller’s originally chosen buyer - which may lead to complications.
What’s more, throughout the option period, the seller’s name remains on the mortgage deed. While the buyer often agrees to take on the associated repayments as part of the arrangement, should they fall behind, the seller will be legally liable for any outstanding amounts.
Finally, as the seller will usually reside in a separate property once the buyer has taken responsibility for the house at the centre of a Lease Option, there will usually be an additional 3% Stamp Duty to pay.