Are lease options a win win, a win lose or a lose lose?
Lease options are a relatively new concept in the UK and there seems to be a lot of bad press about them. But what are the risks of lease options in the UK and is this a complete scam? Many times when a lease option is offered, it’s actually not about selling the house per-se. It can sometimes be about a whole host of other problems, which a lease option can help to solve too.
Those who claim that lease options are a risk or have pitfalls argue that investors are only there to exploit the market and expand their portfolio. But when they say this they don’t realise that the lease option companies with integrity provide lease options as a service to help people in need. There are times when people are unable to sell their home and are facing repossession and need a life-line. A lease option can be a real life-line when provided by a reputable lease option company.
What are the risks of lease options in the UK
To begin with let’s take a look at a few articles that take the view that lease options are a bad thing. I review each of the risks or pitfalls that each of these articles highlight.
The first article, which comes top of the searches “What are the risks of lease options in the UK” is by Emma Lunn of The Guardian. Her article is headed “Lease options – win win … or lose lose?”
Lets take a look at the pitfalls she describes about lease options, and as she describes: “But there are big pitfalls“.
Risk #1 in the Guardian article
“Lease options are chiefly as a way for property investors to exploit the market and expand their portfolio.”
This isn’t true of reputable lease option companies or investors. Exploitation is a short term strategy and never works in the long term.
It’s important if you are considering ‘selling‘ your house on a lease option to make sure you deal with an investor with integrity.
For us there could be nothing further from the truth. Of course we need to make money for our business to work. But the reason I love to provide lease options is to help people. The making money part is actually secondary.
Risk #2 in the Guardian article
“Lease options are completely unregulated, which paves the way for inexperienced or unscrupulous investors to target naive renter-buyers and desperate sellers.”
This is true, lease options are unregulated. But that doesn’t mean they are a bad thing. There are many things that are unregulated in the UK. Whilst an unregulated market can attract the unscrupulous, so too can a regulated market.
I only have to mention PPI claims as just one of a string of frauds committed by banks. The whole 2008 crash was brought about by so called regulated banks. Some bankers don’t even know the meaning of the word unscrupulous.
The banking sector is a highly regulated market. But look at the billions of Pounds the banks have scammed out of innocence individuals. Does that make banks inexperienced or unscrupulous? Inexperienced I don’t know but unscrupulous yes!
So just because a market is regulated doesn’t make it safe! And just because a market is unregulated also doesn’t make it unsafe either. You simply need to pick who you deal with carefully, just like you do with anything else you do.
Risk #3 in the Guardian article
“Vulnerable homeowners may lose their home and still be responsible for the mortgage.”
Whilst it’s true that the home owner is still responsible for the mortgage under a lease option, if the contract is drawn up with a reputable investor, this will never become a problem.
The lease option contract is drawn up so that the investor or ‘buyer‘ pays a monthly lease fee. Which must be at least equal to the monthly mortgage payment
Risk #4 in the Guardian article
“The idea for struggling homeowners, and people wanting to get on the property ladder, is superficially attractive.”
I don’t agree with this statement. It’s an all too regular occurrence when struggling home owners don’t have any other option. Sometimes their only option is to have their home repossessed or to opt for a voluntary surrender.
If faced with repossession, which may lead to the possibility of a mortgage shortfall and possible bankruptcy, I consider a lease option an absolute life line.
Whilst in the current market there are less homes that are in negative equity. There are still home owners who owe more than their property is worth.
If another big down turn happens (which may happen if we Leave the EU without a deal through Brexit), this could happen again. If it does, many home owners will face the negative equity trap once more.
In the situation where a home owner is stuck with a home they can’t sell because of the negative equity trap, a lease option is possibly the best and most fair solution they have.
This then become a true win-win scenario. Whilst it’s true that the investor adds another property to their portfolio, on the other side of the coin, a previously stuck home owner is freed from this awful trap.
Risk #5 in the Guardian article
“The major risk to a homeowner entering a lease option is that the renter/investor stops paying the mortgage.”
Whilst this is true, and as commented earlier the home owner is still responsible for the mortgage, if you contract with a reputable investor who has integrity, this would never happen.
Investors like us and the people we work with, only enter into a lease option with the ultimate intention to buy the property at the end of the lease option period.
Having said that, all option contracts have the right to extend. If at the point of the original time frame it’s not beneficial to exercise the option, the contract may be extended.
But terms like this are always agreed up front between the home owner and the investor.
Risk #6 in the Guardian article
“Lease options are generally frowned upon by lawyers and the Law Society.”
Whilst I would agree that many solicitors are quite disparaging about lease options. This is generally only because they don’t fully understand lease options.
However, if you speak with a solicitor who specialises in lease options, this will not be the case.
In fact those solicitors who are fully versed in lease options understand how important they can be. These solicitors know that lease options help home owners who are not able to sell their home in any other way.
Risk #7 in the Guardian article
“Mortgage experts have warned that most will be against the terms and conditions of most mortgages.”
Whilst this is partly true, no lease option that is arranged by a reputable investor would ever be done without first agreeing the deal with the mortgage lender.
As a part of a lease option deal, the investor takes over responsibility for paying the mortgage. But in order to do so this needs to be done in agreement with the mortgage lender.
If the mortgage lender doesn’t agree to the lease option, either the deal won’t go ahead or the home owner has the option to change mortgage provider to one that will agree to a lease option.
The refinancing of the home will need to be done using a regulated financial adviser. This is because home mortgages are a regulated product. We have found that most mortgage lenders will agree to this type of arrangement though.
If a new mortgage is sought, there may be a problem if at the time there’s negative equity. The new lender would only lend to a certain percentage of the property value. No current mortgage lender would knowingly lend more than the property is worth.
Risk #8 in the Guardian article
“When they say you can buy a house for £1 with no mortgage and no credit checks it rings alarm bells.”
This is taking the hype around lease options to the extreme. Yes it is possible to enter into an option agreement for £1. And yes this has happened, but where a property owner has equity in the house, it’s highly unlikely the option fee would ever be this low.
There are many people who are unable to get a mortgage. This can be a simple as they’ve just started a new business or they’ve recently moved to the UK.
These types of people are unable to get a mortgage. This makes using a lease option to buy a home for them a great option. If someone really wants to have the benefits of owning their own home, but are unable to raise a mortgage, entering into a lease option is a the perfect solution.
Risk #9 in the Guardian article
“Homeowners would need their mortgage lender’s permission for this kind of deal and I doubt they’d give it.”
This is correct, a lease option will not work without the permission of the mortgage lender. However, it’s not correct that a mortgage lender won’t give their permission, because they do just that.
This is particularly the case where someone is in arrears and being repossession. The mortgage company would rather someone take over the mortgage and make sure it’s paid than not. This avoids a repossession and means that the person concerned is helped. They may even get some money out of their home, where if they were repossessed they may not.
This is once more a win-win situation both for the home owner and the investor.
Risk #10 in the Guardian article
“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.”
There is a chance that house prices may fall. This is normal in any property market. However, this scenario taken care of in the lease option contract. All option contracts should include an extension clause, unless the home owner specifically asks for it to be excluded.
In the event that house prices fall, the investor simply won’t exercise the option and will extend the option. This has no detrimental affect to the home owner at all. It just means the option exercise is delayed.
Risk #11 in the Guardian article
“If house prices rise they’re likely to regret agreeing a price at the time the option was taken out.”
This is just about how life is, you can never look back with hind sight and regret a decision. It’s always very easy with hind sight to say you wouldn’t have done something after the event.
But you make decisions based upon the information in front of you at the time. The same could be true about buying or selling a house with a conventional purchase or sale.
Don’t you think that all those people in negative equity would be kicking themselves and wished they’d never bought the property. Or those that waited to buy property in London for example when prices were once affordable, but now are not for many!
With lease options all the terms in the contract are agreed based on the facts at the time. This is always done in an open and honest discussion with any reputable lease option company who has integrity.
Risk #12 in the Guardian article
“When the time comes to exercise their right to buy, they still can’t get a mortgage and they’ve wasted their money.”
This is talking about a person buying a property on a lease option contract. In a similar way to how an investor has the right to extend the option to purchase, a person looking to buy a property on a lease optiuon will have the same terms.
If the buyer cannot obtain a mortgage at the point the option agreement is about to end, they have the option to extend for a further period. This extended period will allow time until they may become eligible for a mortgage.
The next article I’m going to review is one written by the Citizens Advice. Their article is headed “Problems with selling your home – delayed completion and lease options contracts“. But in particular I want to focus on their section – “What are the risks?”
In this section of their article, they list the following risks:
Risk #1 in the Citizens Advice article
“You’re still responsible for your home and the mortgage even if the buyer takes over payments to the mortgage lender. If the buyer gets into financial difficulties, you’ll be responsible for any debts or missed payments and you could lose your home.”
This is true, you are still responsible for your home ultimately. Also, and as explained before, you are still ultimately responsible for the mortgage payments.
Whilst it is possible for the investor to get into financial difficulty, with how we work this is extremely unlikely. If you choose the right investor to enter into a lease option, you shouldn’t have this problem.
Risk #2 in the Citizens Advice article
“You may be charged fees which may not be clear or reasonable.”
With any investor who has integrity and a good reputation, all fees and terms of the lease option should be fully explained at the outset.
I’d always be the first to recommend that you shouldn’t enter into any agreement you don’t understand or if there’s any clause you’re not happy with.
Risk #3 in the Citizens Advice article
“You could be breaking the terms of your mortgage agreement if you don’t get your lender’s permission before you enter into one of these schemes.”
As already explained, with any reputable lease option company, the lease option would not be entered into without first obtaining permission from your mortgage lender.
Risk #4 in the Citizens Advice article
“You could be agreeing to unfair contract terms without considering what they mean for you in the long term“
Any good lease options company would carefully explain all the terms of the lease option, before it is put in place. But also, most good lease option companies, us included, insist that the home owner is separately represented by a solicitor. If you don’t understand anything, you should speak with your solicitor.
However, as mentioned before, you need to be dealing with a firm of solicitors who are familiar with lease options.
Risk #5 in the Citizens Advice article
“If what you’re being offered is actually a sale and rent back scheme and the firm or individual is not authorised by the FCA, you will not be covered by the Financial Services Compensation Scheme. You will also not be able to complain to the Financial Ombudsman Service if things go wrong.”
I agree with this and I’m not sure about other lease option companies, but we don’t offer sale and rent back schemes. If you are keen on a sale and rent back scheme, you’ll need to look for another company that offers this type of contract. But if you do, make sure they are authorised to do so by the FCA.
The same article by the Citizen’s Advice goes on to include a section about: “What other options have you got?” The options they list include the following:
“If you’re considering one of these schemes because you’re struggling to pay your mortgage, look at these options first:
- ways of reducing your mortgage costs.
- ways of controlling any mortgage arrears.
- increasing your income and cutting your spending.
- selling your home on the open market.
- checking that you’re getting all the welfare benefits and tax credits you’re entitled to.
I agree, but often times people are considering lease options because they’ considered the above list and still need help. I’d be willing to listen to anyone who gives another solution for someone who’s exhausted the above list first.
Becoming a landlord – advice from Citizen’s Advice
The other advice Citizen’s Advice give is “If you’re considering one of these schemes because you need to move but are having difficulty selling your home, you could think about renting it out yourself, or using an agency to do it.”
There’s actually nothing wrong in this advice, as I’d be the same. In fact I give the same advice to people in this article – “How to sell a house fast in a slow market (7 top tips for the UK)” and in this article too: “What happens if you can’t sell your house? (11 real solutions that work!)“
However, not everyone wants to become a landlord. Plus when you’re a landlord yourself, you are still responsible for the mortgage. If you have a void period (i.e. you don’t have a tenant) you still have to keep paying your mortgage.
There are also new tax implications of being a landlord. The Conservative government thought it a good idea to not allow mortgage interest relief against rental income. How bonkers is this!
Further help and advice on lease options
If you’ve read this article and you need to speak to us about your options or if you need more information about lease options, please contact us.
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