Lease options are sold as the answer for those struggling to get a mortgage. But there are big pitfalls
Visit any one of a number of online property investor forums and there's one subject dominating conversations: lease options. The deals are touted as a one-stop solution for struggling homebuyers and "motivated" sellers, but chiefly as a way for property investors to exploit the market and expand their portfolio.
But anyone thinking of getting involved should know that these deals are totally unregulated and that vulnerable homeowners may lose their home and still be responsible for the mortgage. The Financial Conduct Authority warns against lease options, as does the Council of Mortgage Lenders.
Lease options are also known as "rent-to-buy" or "rent-to-own". The idea for struggling homeowners, and people wanting to get on the property ladder, is superficially attractive.
Let's say the owner has to sell because of a divorce, or because their job has relocated to another part of the country, but the market in their area is slow. Let's also say we have someone who is renting but is keen to buy, but can't afford a deposit. You bring the two together with a lease option. The divorcee moves out, and the tenant moves in, and takes over the cost of the mortgage on the property. The new tenant is given the choice (the lease option) to purchase the property, at a pre-set price, during or at the end of a certain period, usually around three to four years.
The tenant – or more likely, an investor who then goes and finds a tenant – pays an "option fee" upfront to set up the deal. This can be as little as £1, which has led to some lease option companies declaring to potential investors they can "buy a house for £1".
A middleman, usually a property investor, sets up the deal and takes a cut of the option fee, rent, and a "back-end" payment when the option is exercised. The contracts are often promoted to buy-to-let investors as a quick way of growing their portfolio, allowing them to control a property without actually investing any money.
Property investor and trainer Mark I'Anson, who claims investors can make £10,000 a month from following his techniques and speaks at £350-a-ticket seminars, describes the deals as "a tool for retail investors to control an asset to produce profit".
"The basic idea is to make a small profit (payment) for managing the property for an agreed length of time by renting it out. The profit is the difference between the outgoing mortgage payment, maintenance plus usual property expenses, and the incoming rent," he says, "A price is agreed for a possible future sale of the property and the potential buyer gains exclusivity of the purchase for an agreed time."
Ben Rogers is another promoter of lease options, who sells "insider secrets" to "buying houses for £1" and describes himself as "one of the UK's niche experts in this way of controlling property for profit". He says: "We normally sell to people who want home ownership and can't afford a mortgage now, or don't qualify for one. Also, self-employed people who can't get a mortgage, or people that need time to qualify for a mortgage or save for a deposit. The beauty of it is that the buyer is fed up paying dead rent to a landlord where they have no control or security about the property. This way they can decorate or put a new bathroom in."
Rogers makes it sound like a win-win situation but one of the main concerns about lease options is that they are completely unregulated, which paves the way for inexperienced or unscrupulous investors to target naïve renter-buyers and desperate sellers.
The major risk to a homeowner entering a lease option is that the renter/investor stops paying the mortgage. Under a lease option, the name on the mortgage is not transferred, and if payments stop, the original homeowner is still liable for the debt. The BBC's 5Live Investigates programme featured one couple who agreed to a lease option, only to face repossession and additional debts of £30,000 after the mortgage was not paid.
Martyn Morgan, solicitor at QualitySolicitors Talbots, says lease options are generally frowned upon by lawyers and the Law Society.
"It is a very dangerous process, particularly for sellers, to grant options to investors to buy a property. The title and mortgage remain in the names of the sellers, so if there is any default on repayment of the mortgage, the seller will be pursued for payment," he says.
Nigel Rowley, managing partner of solicitors Mackrell Turner Garrett, says lease options can work for some people but warns there are unscrupulous companies who market the deals to the desperate and those who see little hope of getting on to – or off – the property ladder.
"Owners accept the promises that tenants will be put in, and that the original mortgage will be paid. But how do they know it will?," he asks. "How do they know whether the property is, in fact, being properly looked after, the mortgage properly paid, tenants in occupation etc. They don't – until it is too late."
It's worth pointing out that lease option advertising tends to be similar to that for quick house sales, an area of the market the Office of Fair Trading is currently investigating. Typically, lease option firms offer "100% of the market value" – but this means today's market value not the market value when the deal completes in X number of years.
The Financial Conduct Authority has lease options on its radar while mortgage experts have warned that most will be against the terms and conditions of most mortgages.
"When they say you can buy a house for £1 with no mortgage and no credit checks it rings alarm bells. It's a large financial commitment and the investor has no personal investment, which makes me very wary," says Stephen Smith, housing director at Legal & General. "Homeowners would need their mortgage lender's permission for this kind of deal and I doubt they'd give it."
Sellers agreeing to lease option deals arguably have more to lose than buyers. If house prices rise they're likely to regret agreeing a price at the time the option was taken out. If prices fall there's a risk the buyer or investor will not exercise their option to buy, and they'll still be stuck with the property.
Buyers, meanwhile, might pay a high rent for years then find, when the time comes to exercise their right to buy, they still can't get a mortgage and they've wasted their money.
I'Anson argues that every party in a lease option should do due diligence on the company they are dealing with. He says a reputable lease option company will have a recognised complaints process, indemnity insurance and a data protection licence.
"A few simple steps will keep everyone a little safer; as an industry, we have to act as if we are regulated and that's the most professional way to be," he says. "If the company you're dealing with doesn't carry all of the above I'd suggest staying away and finding one that does."
