Archive for the ‘Rent to Own / Buy’ Category

Rent to Homebuy and Rent to Buy are not the same

September 18th, 2009

The opportunity for renting a property with the option to buy at a later date is gathering more and more interest.  A multitude of businesses are now getting involved, some to help investors sell their properties to tenant-buyers, others to offer advice to the would-be property buyer.  Many terms are used for similar ways of making the transition from tenant to property owner, these include Rent to Own, Rent to Buy, and Rent to HomeBuy, however there are differences that you need to be aware of.

Rent to Homebuy

This is a “not for profit” scheme set up mainly for new-build properties.  Typically a Rent to Homebuy scheme may require rent to be paid at around 80% of the market rate, with a balance being accumulated toward a deposit for eventual purchase.  That said the organisations offering Homebuy have varying critieria in terms of rent and saving toward a deposit.

The Rent to Homebuy schemes may run for up to 5 years during which time you have the option to purchase the property at any time. Anyone wanting to buy a property in this way has to qualify first, this includes your level of income and also that you are able to demonstrate you cannot afford to buy a property on the “current” open market. 

Some Homebuy schemes will only provide an option to purchase a share of the property, others will allow you to buy a property outright.  This is a key factor to note, when you get into a position to afford a mortgage you need to ensure the lender will provide a mortgage on the basis being offered, e.g. a shared ownership mortgage. Many lenders will not offer this type of property mortgage.

Rent to Buy

This is also known as Rent to Own, it is a generic term that applies to the wider market for tenants wanting to rent then buy a property.  Rent to Buy/Own is global and a common purchase method in USA and Australia where the financial regulations make it easier for people to purchase in this way. 

An increasing number of companies in the UK are now providing services ranging from agents offering properties as “rent to own” through to legal and training services for those who want to build up an investment portfolio using lease options. 

Lease options is the generic term for the legal structure underpinning almost any type of rent to own scheme, it is absolutely essential that a solicitor is used to set up these agreements to help ensure that both the seller and tenant-buyer have a proper legal basis to transact.

Summary

Rent to Homebuy is a relatively small grouping of “not for profit” businesses providing the opportunity for a tenant to buy a “new build” property. Rent to Homebuy terms will vary according to the geographical location and the company providing the service.

Rent to Own (or Rent to Buy) is the more common commercial term used where any property can be purchased by a tenant using a legal document known as a lease option.

You can find out more about Rent ot Own here … Rent to Own resources

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Lease Options – points to note for property buyers

September 15th, 2009

There is a lot of advertising saying you can “buy a house for £1”, the fact is YOU CAN NOT, it is just marketing hype.  The £1 will buy you an option agreement, this is an agreement that gives the holder the “right to buy” the asset (e.g. buy the property) for a pre-agreed price at a future date.

Lease options are not the same as “rent to own”, they are option agreements used as part of a solution for “rent to own”.  If you are a tenant who wants to become a property buyer (referred to as a tenant-buyer) you need to ensure a solicitor is used to draft the lease option agreement.

Sandwich options is another term often used, this is not the array of choices on display at Pret A Manger, the sandwich option is effectively two options agreements working together.  One agreement gives the holder the right to buy at a fixed price in the future, the second (subsequent) lease option agreement effectively passes on the right to buy to another. 

Why do sandwich options exist?  This allows the first option holder to have a right to buy (at say £100,000), the first holder then gives the second option holder the right to buy at a higher price (at say £110,000).  In this way the first option holder will make a profit of £10,000 when the property is purchased by the subsequent option holder.  This may all sound a little confusing, which is why you need a solicitor to draw up these agreements!

With mortgages harder to obtain some property investors are starting to “take control” of a property using a lease option.  These investors then effectively sell on their right to buy (using what is referred to as a sandwich option) to a tenant buyer.  Overall a win-win situation can be created here, both the property investor and the tenant-buyer win.

If you would like to know more about lease options and rent to own we suggest you visit a specialist forum, details found here http://www.repaymortgage.co.uk/blog/rent-to-own/

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One Pound House

August 26th, 2009

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.

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Rent to own – example

August 21st, 2009

Many people are now starting to take an interest in rent to own / lease options / rent to buy.  We published an article about lease options earlier, this article gave an overview of how lease options were used.  We are also now proving a real example of a rent to own opportunity to show what a tenant-buyer may expect to find.

THE PROPERTY AVAILABLE AS RENT TO OWN

The property is a 3 bedroom end of terrace house in Andover, Hampshire and has a current value of a little below £150,000.

The vendor is offering the property to purchase at ANY TIME in the next 5 years for a fixed price of £150,000

The rent for the property is £700 pcm, which is around the market rent level. This rent is FIXED for 5 years, no increases.

The tenant-buyer pays an additional £100 pcm on top of their £700 rent, this additional £100 pcm goes toward the eventual purchase deposit.

The tenant-buyer pays an initial deposit of £2,000 when they move in, a little more than you would expect to pay when renting.

LOOKING AT THE FINANCIALS FOR THIS RENT TO OWN EXAMPLE

The rent is fixed for 5 years at “today’s” market rent.  So in subsequent years you will be “saving” on the monthly rent assuming rents go up with inflation.  Lets assume you save £15 pcm in year one, £30 pcm in year 2, an so on.  Thus after 5 years you have saved £1,800.

Over the 5 years you will have saved £100 pcm toward your purchase deposit, in addition to the initial £2000 deposit you paid.  In total you will have saved £8,000 toward the purchase deposit in 5 years time.

Lets assume the property prices will be 15% higher than today in 5 years time, based on today’s price of say £145,000 that gives a valuation in 5 years of £166,750.  Giving a capital gain on the property of £16,750

FINANCIAL SUMMARY

Property value in 5 years time = £166,750

Amount you need to pay is £142,000, this is the £150,000 fixed price less that £8,00o saved up.

A mortgage for £142,000 equates to approximately 85% of the property’s value, so you should have no problem getting a mortgage. 

And to cap it all off you own the property and have equity of £24,750

Of course any one’s circumstances can change in 5 years time, but as you are no obliged to purchase the property you can walk away from it any time , all you would lose is your deposit and £100 pcm savings.

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Lease options and rent to own

August 19th, 2009

There is an increasing number of people and companies now getting involved with lease options and rent to own.  For many the concept is totally new, and most of those who have heard about lease options do not know how they actually work to the benefit of everyone involved.  So here we will explain some more.

Firstly “rent to own” or “rent to buy” (both refer to the same thing) are processes by which a tenant takes on a property in a similar way to a normal tenant, but additional with the right to become the owner of that property. The right to own the property is where the lease option comes into play.  The option is the legal contract that provides the holder of the option (e.g. the tenant) the absolute right to execute that option at a later date.  So how is the option set up?

The option itself is very flexible in how it is constructed.  There are several components to the option, these are:

  • The date by when the option has to be executed.  If the option is not executed on or before this date the option will lapse (e.g. the tenant will lose the option).  The date by when the tenant has the right to execute the option is defined in the lease option contract, this can be anything from a few months to many years. 
  • The option price, this is the price at which the property can be purchased.  Often the option price is at or below “today’s market price” where the date for execution is in the near future. This makes sense if for example you have the right to buy at anytime in 12 months, you would probably not expect property prices to by much higher than they are today (August 2009).  But if the option is for a longer period, say 5 years, then it is reasonable that the option to buy price is set at a price considerably higher than today’s property price – but of course below what you would expect the property to be worth in 5 years time.
  • The option fee.  This is the amount paid to be given the option.  Usually the fee is quite low, maybe similar to the amount for a normal rent deposit, sometimes higher.

The lease, this is in effect the rental agreement for the property. This agreement will state what the monthly rent is, in some cases a component of the rent is accumulated and then deducted from the eventual purchase price, in effect allowing the tenant to save toward a deposit.

The key for the tenant taking on the lease option contract is for all parties to negotiate terms that agreeable to everyone involved.  The advantages are clear, especially for the tenant-buyer, they are renting a property which will become their own property at a future date, allowing time to save for a deposit and improve their credit ratings to take on a more competitively priced mortgage.

We will soon be publishing details of training courses, workshops and training packs for those interested in lease options.  If you would like to know more email service@simple2buy.co.uk

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What are lease options?

July 24th, 2009

“Lease options” is a term used where an individual or company leases an asset (e.g. a house or other property) with the option to purchase the asset at a later date. Options are nothing new and have been used extensively by businesses for decades, however it is their application to residential property that is potentially very exciting.

Lease options are a fundamental component for “Rent to Own” or “rent to Buy”, the lease option is the legal contract that provides the tenant-buyer with the right to purchase a house, flat or other property for a fixed price at a future date.  Here is an example of how it could work for a tenant-buyer:

Firstly they find a property that is available to purchase via a lease option.  Key here is flexibility, only a small percentage of properties are available to purchase using a lease option, so having a wider range of properties that would be acceptable to purchase increases the chance of finding one.

Next you need to agree the financials.  There will be several elements; the lease option deposit; the monthly rent; the purchase price;  the option period; clarifying how much (if any) of the monthly rent can be accrued toward the eventual purchase price.

Typically a lease option for a tenant-buyer could be agreed with a deposit equating to 2-3 months rent; the rent would normally be at market rate + an additional amount to save toward your purchase price; the option period would normally be in the range 1 to 3 years; the purchase price would usually be around today’s valuation.  Once you have agreed these details a solicitor would incorporate them into the lease option contract.  The whole process can happen very quickly, often less than 1 month, in some cases within one week.

It is not possible to go into all of the details here but we strongly recommend visiting the forum “simple2buy.co.uk/forum” where you can browse  Q&A, ask questions yourself, and even post details of the type of property you are looking for.

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Mortgage Recycling

July 22nd, 2009

The phrase “mortgage recycling” describes what is starting to happen in the UK as a means to get round the inability of banks to provide mortgages.  You could call this an environmentally friendly way of helping buyers to get their own home and bypassing the banking system until such time as it recovers.

Mortgage recycling is where the buyer takes over the mortgage from the existing borrower and then moves into the property, thus there is no need for the property buyer to apply for a new mortgage.   In some countries such as USA and Australia, the buyer can have the vendor’s mortgage “reassigned” to them, thus making the process of mortgage recycling quite straightforward.  In the UK it is not possible to “reassign” the mortgage, it remains in the name of the original borrower, which until recently has made it difficult for mortgage recycling.  But there is now a solution to this, and here is how it works:

1 – The buyer finds a property they would like to buy, but it has to be a case where the existing vendor has little or no equity in the property, or they are willing to leave any equity they have in the property for a few years.

2 – The buyer takes out a lease option agreement where they have the right to buy the property at any time over say the next 3 years (the term can vary).  The lease option contract will stipulate that the buyer will insure and maintain the property and pay the vendor the equivalent of their monthly mortgage payments – including any future increases or decreases in these payments.

3 – Whilst living in their new property under the lease option agreement the buyer works on improving their financial situation to take on a mortgage when the lending market improves.  The idea is to have a lease option term that allows sufficient time for an adequate deposit to be saved, credit rating to be improved, etc.

4 – At or before the end of the lease option period the buyer obtains their mortgage and completes the purchase of the property. 

The above steps are a very brief outline of how this works, more information can be found at simple2buy.co.uk/forum where experts are on hand to explain the process … more commonly referred to as “rent to own”.   It really is a great way for people who cannot get mortgages today to get on the property ladder, and also for the vendor to release themselves from the ties of their property.

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Rent to Own / Buy?

June 26th, 2009

So what is this about?  Well its an amazing concept to buy your first property, put simply you start out renting the property as the tenant, then at a later date you exercise your right to buy the property.  This has been going on in Australia and USA for some time and a whole industry has grown up based on this concept of “rent to own” or “rent to buy”.

The hardest part is finding a property available to purchase in this way.  Ideally you need a vendor who does not need to take their equity out of their house right away, but equally they need to move quickly and don’t want to leave their property empty waiting to find a buyer.  In other words, someone who wants to sell their house fast but are willing to wait for the equity. 

The advantages to the tenant-buyer are clear, but there are also advantages for the vendor.  For example the vendor can agree a price to sell in advance, they get a large rental deposit from the tenant, and they get a tenant who is going to look after the property as if it were their own – because in 2 years or so it will be their own property!  If you want to know more about how this works try http://www.simple2buy.co.uk/forum/ where you will find some experts on this new (to UK) concept of Rent to Own / Buy.  Update 20 July 2009 – you can now advertise for free the type of property you are looking to Rent then buy.

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