In a recent video, I go to Sunderland where one of my students, Pete, has just bought a 28 -bedroom apartment block on a lease option agreement with no money down! He totally refurbished each block using none of his own money and Tony Crook, a mentor at Property Investors academy, was his investor. All the blocks are now fully let and they are making £2000 profit each. You can see the full story in the video above.
Lease option agreements are a great way to control property without investing much of your own money. Lease option agreements are when you take over a property and have the option, but not the obligation, to purchase it by a future date. In the meanwhile, you pay rent to the landlord for use of the property. In this article, I am going to provide you with 3 important things you need to do when you are negotiating a lease option.
1. Find a motivated seller
The first step is finding someone that wants to get their property off their hands fast. This could be a tired landlord who simply doesn’t want the headache of handling the property any more. In Pete’s case, it was a portfolio landlord who had other bigger projects to focus on and didn’t want to renovate a rundown building.
Another great way to get a lease option agreement is to find a property in negative equity. Negative equity is where a property is valued less than the current owner paid for it. This means the current owner would lose money if they sold the property now. You can offer to take over the property and cover the mortgage, then have the option to buy the property at a higher price in a few years.
2. Agree a rent free period
When you first take on a lease option property, you will need to conduct work before you can start letting tenants move in. Therefore, it is a good idea to negotiate a rent free period with the landlord. This allows you time for setting up and also for getting the right tenants into the property.
If you are incurring rental costs from the moment you take on the property, you may feel tempted to take on tenants you would otherwise deem unsuitable. Having a rent free period allows you the time to properly reference tenants and ensure they will suit the property that you will be managing.
3. Get the landlord to cover some of the refurbishment costs
A lease option property is likely going to need work done to it. It is unlikely that the property will be ready for tenants to simply move into directly. How much of that refurbishment is paid for by you and how much is paid for by the landlord is up for negotiation.
Work with the landlord to get an understanding of what they are willing to cover and what you will need to pay for out of your own pocket. There are no hard and fast rules about this, so be prepared to negotiate and be flexible when necessary.
