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Lease options are sold as the holy grail of property investing. Buy homes for £1 and build your portfolio without a deposit. Sounds too good to be true?! There’s any number of courses out there, promising to teach you this amazing strategy.
So are lease options a scam or the holy grail? The answer is neither. It’s a legitimate strategy to build your property portfolio, but it does have it’s limitations. In this article, I’ll explain what lease options are and how you can buy properties without a deposit. I’ll also cover the limitations and the difficulties with this strategy.
Lease options are definitely a more advanced strategy. Something that investors do once they move on from buy to let. If you’re interested in other advanced strategies, then I’ve written articles on commercial property investment, Airbnb strategies and long distance investing.
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A purchase lease option gives the investor the right (but not the obligation) to buy a property at a certain price, at a certain date in the future. The price and the date are agreed at the beginning of the deal. To enter into a lease option, you will need to purchase the option from the property seller. The fee for the lease option can be as low as £1, and this is why people say “buy homes for £1.”
An example contract could be as follows:
- Pay £1 today, to purchase the lease option
- Buy the property for £100,000, 5 years in the future
So as you can see, you’re really not buying a home for £1. To own the property, you still need to pay the full purchase price. However, during the 5 year period, you will assume total control of the property.
So how can an investor profit from a lease option? Let me start with an example deal.
- Seller offers their property for sale for £100,000
- Investor agrees a lease option deal with the seller
- The investor has the right to buy the property for £100,000 in 5 years time
- The investor has paid £1 for this lease option
- The seller’s mortgage payments are £200 per month
- The investor agrees to pay £250 per month to the seller for the next 5 years (the lease period)
- The investor agrees to pay all costs associated with running the property
- The investor rents out the property for £400 per month for the next 5 years
- The investor saves the monthly profits for 5 years
- After 5 years, the investor uses the money saved up for a deposit
- The investor buys the property for £100,000
The seller of the property benefits, as they get enough money to pay their mortgage. They also benefit as they can get the £100,000 asking price for their property.
The investor benefits as they can buy the property, without having a deposit right now. The investor will also make a profit for the next 5 years, until they purchase the property for £100,000.
As you can see, if this strategy is used properly, you can build up a property portfolio without having a deposit available.
In the right circumstances, a lease option deal can be a win-win for the buyer and the seller. In such a scenario, a lease option can be a very powerful tool for the property investor.
There are some clear downsides with using lease option strategies. The people with courses on how to buy homes for £1, may not be upfront with the difficulties!
The most obvious difficulty is that most sellers won’t be willing to do a lease option. If someone can sell their property on the open market, then why would they take part in a lease option deal? You need to find situations where the seller can’t find a buyer on the open market. Maybe the seller is in negative equity or maybe the market is difficult. This is why investors typically use ‘direct to vendor’ strategies to source deals. If you get a leaflet through the door asking if you want to sell your property, there’s a good chance that the buyer plans on using a lease option.
Another weakness with the strategy is that you need to pay the seller, even if your property is empty. During the 5 year lease period, you need to pay the seller, even if the property is empty. By buying a lease option, you assume all of the risk associated with owning the property.
Also, when you make an offer for a lease option, you’ll probably need to educate the seller about the deal. This can be difficult, as they typically won’t know what a lease option is.
As I mentioned above, sourcing deals for lease options isn’t always simple. To state the obvious, a seller won’t do a lease option if they can sell the property straight away. So it’s the investor’s job to find a seller, that is willing to accept a lease option deal.
You can source lease option deals through estate agents, however there are difficulties with this. Often, estate agents will be reluctant to put your offer to the seller. If the seller does a lease option, then they may refuse to pay the estate agent a fee. As such, lease option investors often use alternative strategies.
For sale boards
If you see a for sale board, then put a letter through the door and ask the seller to contact you.
Direct to vendor
This is probably the most common way to find lease option deals. Put leaflets through people’s doors and ask if they have a property to sell. By using direct to vendor, you can create a line of communication with a property owner. This gives you the opportunity to have a detailed discussion, and structure a deal that works for both of you.
Private deals are another good way to source properties for lease options. Speak to people and ask if they have a property to sell. Tell everyone you know that you are looking for properties, and ask them to contact you.
So what are lease options? They are a legitimate way to build a property portfolio, without a deposit available. In the right situation, it can be a powerful tool to get property transactions done.
Lease options are definitely not a scam, but the strategy has got a bad reputation in recent years. Many people have set up courses, promising to tell you how to buy homes for £1. Many of these ‘experts’ have never done a deal in their life.
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