Sounds crazy but it is almost true – you can buy an option on a house for one pound plus some legal fees which many of us forget to factor into the costs of buying a home.
The “one pound house” term comes from the fact that you can buy an option agreement for a house at a price of just £1, the option agreement gives the holder “control” over the property, but it does not mean that they actually own the property. The option is giving the holder the “right to buy” for a fixed price at some time in the future.
Just like someone can purchase a share option agreement it is also possible have an option (to buy) on almost anything that has a market to buy and sell. The option agreement is very powerful and allows the holder to leverage any expected increases in the value of the asset they are buying, so an option for £1 to buy a house which then increases say £20,000 in value looks like a very attractive investment.
So how do you buy a house for a pound (that is have the option to buy)? Well this is the clever bit, the option is taken out in conjunction with a lease agreement, where the lease gives the holder the right to use the asset (in this case the property) for the duration of the option contract. Lets put this into an example:
You take an option to buy a property valued at £100,000, the price you pay for the option is £1. This option gives you the right to buy that property for £100,000 at anytime in the next 3 years.
In addition to taking out the option contract you take out a lease agreement, this gives you the right to use the property (e.g. live in it) for a similar period, e.g. 3 years.
When the 3 years is up (or at anytime before) you execute your option to buy, that is you take out a mortgage and buy the property for the agreed price (3 years ago) of £100,000.
If the price of the property increases over the next 3 years you make a good profit, if the price of the property falls (which seems unlikely from 2009 onwards) then you simply do not execute your option to buy.
And there we have it, the option to buy and the lease agreement. When used together we have what is called a “lease option”, and it is becoming a very interesting way to get on the property ladder. You will find more about lease options in our category Rent to Own / buy.
