– Hello, and welcome to
this week’s edition of, “Money Matters”. What are we talking about this week? We’re talking about lease options. What is a lease option? Some people call them PLO. Let’s just stick with the definition called a lease option, yeah. So a lease… option. A lease is just a fancy word for rent. So a lease is typically a
commercial property term and it tends to mean a
longer term arrangement than six months. So if in a normal residential lease, you’re probably on a six month AST, whereas a commercial lease could be five years, 10 years, 15 years, could even be 35 years or more. But lease, however you define it and describe it, is just
another word for rent. Okay, so the lease part of a lease option just means you’re renting it. The option part, in this sense, it means an option to purchase. It could be an option to sell, and this is used in the
stock market all the time, an option contract. This could be a put
option or a call option, that means you’ve got the right to buy or the right to sell at the certain price. So this is no different. I see “No, it’s very illegal and dodgy”. No it’s not. It’s a legal arrangement. You need to make sure you do it right. But what you’re doing
with a lease option is you’re renting a property and you’re going to lease it at a certain amount of money per month for a certain number of years, with various conditions. You could have break clauses, you could have exits. So what does that mean? Well, a five year lease
with a six month break is that a rolling break? Is it a fixed break? Don’t get tied up in the words. It’s whatever you told your solicitor to agree with the other side. So a five year lease
with a six month break could be a five year lease but you want to make
sure it’s working out, so you’ve got the option
to terminate the agreement at month six, just in
case it’s not working out. Or it could be a rolling break, what does that mean? It means you can break at any
time giving six months notice. So when I say it makes me shudder I saw it yesterday, somebody put in one of
their Facebook communities, “Has anyone got a lease
option template I could use?” I thought, no, you can’t use a template. That’s like saying has anyone got a template
for a conversation, has anyone got a template
for an agreement? If you’ve got a template for an agreement, could you please put it below? If you’re doing a property transaction, a lease option transaction, don’t do it on a template and make it up yourself and change it on your front
room with coffee stains on it and a red pen. Use a solicitor. Because you’re going to need
to agree with the other side whatever you’re going to
agree with the other side and then it needs to get
turned into a legal document. Don’t use a template. So we understand now
what the lease part is. We understand, I hope, that
it’s a specific agreement that you’ve reached in conversation for logical reasons with the other side and it’s a win-win scenario, cause it needs to be, or
it’s not going to work. The option part means
you’ve got the option to purchase it. You can buy it but you don’t have to. Property prices generally
double every seven to 10 years. So think about a house where you are and think about what the price of that house was 10 years ago. Now, if you had a lease
option on it 10 years ago, a 10 year lease option, what you could have done is you could have rented it to a tenant or to yourself or whoever. So someone’s been in
it, paying rent to you. You’ve given, then, some of that rent to the person that’s given
you the lease option. In 10 years time, say you bought… Say 10 years ago, you took a bite of let’s say it was a… I don’t know, in Doncaster here let’s say it was a three bed semi for a hundred thousand pounds. 10 years later, it’s probably worth 160, 170 thousand pounds, so it hasn’t quite doubled, but nearly. And for a three bed semi,
depends the area, of course, but let’s say the lease part of the lease option was 400 pound a month because the landlord you’re leasing it off has got a mortgage
that’s 200 pound a month. So they’re making 200 pound a month profit out of you, but you in turn are renting it out to a
tenant for 600 pounds. So it’s not your property, you’re renting it out
under a lease option, you’re collecting 600, giving 400 to the landlord, meaning you’re making 200 pounds. Roll the clock forward 10 years and you’re now interested in buying it, well, you’ve got the option to buy it for a hundred thousand
pounds, don’t have to, but you’ve got the option to buy it for a hundred thousand pounds. But it’s worth 160. So when the valuer goes
in to do the valuation, values it at 160, you take
a mortgage on that 160, probably 75 percent, doesn’t
have to be but often is. So 75 percent of 160 is 120. So you take 120 thousand pound mortgage on 160 thousand pound house but you’ve only got to pay
a hundred thousand pounds for the option. All lease options that I’ve ever seen, that I’ve done, are assignable. It means that you’ve got
the right to assign it to somebody else. So let’s say, year five, my
daughter’s getting married, I want a new car, I fancy
a holiday to Australia, whatever, I just want some cash. Let’s say by that time the hundred thousand pound property on which I’ve got a 10 year option but I’m only halfway
through, so only year five. Let’s say by that stage
the house is worth 135. Can I sell that lease
option to somebody else for 135 even though I
only paid 100 for it? Yeah, I can. So what would they give me? I don’t know, you can negotiate probably 20, 30 grand or something because it’s assignable. So I could sell that lease option to them. I never owned the property
so I could make a profit by selling the lease
option to someone else just like stocks and shares. So the specific thing, number two, that we’re to make a note of is make sure you’re lease
options are always assignable. So thing one, never use a template. Thing two, make sure they’re assignable. Okay, thing three, is have
a look at some examples. I’m going to look at
two specific examples. One of the first properties
that we ever bought in Doncaster was a four bedroom house that could be turned into a six bed HMO. We rented it as, we rented it, myself and Annika rented it as a four bedroom house. In the garden, it had this huge outhouse that was self-contained, that you could put two more rooms into. So it was four en suite rooms, it wasn’t but it could be turned
into four en suite rooms in the main house and then two en suite
rooms with another kitchen in the garden. So six en suite rooms,
with two kitchens, yeah, that’s how it ended up. So we rented that property for
five hundred pounds a month. It was a four bedroom house and this is a number of years ago and we took the option to purchase, a purchase option on it, again, a number of years ago for 86 thousand pounds. We were then approached later on, roll the clock forward a couple of years. Cause at that time we
were doing a lot of HMOs. In that particular year, we did 48 HMOs for us or for investors. We were finishing like one a week. And one of these investors came to us and said, well, I’d like
to buy a six bed HMO and I’d like you to buy me a house and I’d like you to develop it for me and then I’d like to rent it out and I’d like you to look after it and rent it out as an HMO. And that conversation
happened a lot in those years. So we had this property on
a purchase lease option, a lease option. We were responsible for paying the five hundred pound a month but we had the option to purchase it for 86 thousand pounds. Now we knew, that by the time we’d done the conversion and as a six bed HMO, it would value up about
210 to 220 thousand pounds. We also knew the
conversion cost was around about 50 thousand pounds. Six en suite bedrooms, two kitchens, rewire, replumb, they’re a lot of work to do. So we, then, said to the investor, okay, it’s going to be
worth 220 at the end. It’s going to cost you
about 50 grand to do it. So 220 minus 50 is 170. We will sell you this property for 120 thousand pounds. Now, because it was an
assignable lease option, an assignable contract, what we were able to do, on the same day, is exercise our option for 86, sell it onto them for 120. So we didn’t actually need
any money to buy the house cause we never bought it. What we did is we sold
the right to buy the house to the person that wanted us to change it into an HMO for them. So the lease option
that we’d taken for 86, we executed that lease option, we took advantage of that lease option, not at year 10, this was about 18 months. We made 34 thousand pounds in one day for a property that we didn’t own. It’s powerful stuff, isn’t it? And the assignable benefit is this, if it wasn’t assignable, we
could still have done that but we’d of had to buy it, which means would’ve needed
to get 86 thousand pounds from somewhere. We’d of had to pay stamp duty, we’d of had to pay legal fees, then on the same day we’d
have to sell it again for 120 thousand pounds to somebody else. They’d of had to pay the stamp duty and the legal fees. And we’d of needed money. But because we didn’t buy it, because we just sold the right to buy it, we banked the difference. So you’ll sometimes hear about people talking about a
contract for difference. That’s what a contract for difference is. It means you can buy it for
this and sell it for this on the same day without ever owning it. And for many people, I thought, Jesus Christ, you just
conjured 34 thousand pounds out of thin air. So that’s what a lease option is. That’s how you use it. We haven’t really talked about why would people do lease options. So in other words, it’s
obvious why you would want the lease option, why would somebody enter
into a lease option? That’s a subject for “Money
Matters” all on its own. Suffice to say, there’s
many different reasons. People will do it… I’ll give you an example because they’re in negative equity. They might be trying to sell the house for 86 thousand pounds but maybe it’s only worth 75 thousand and maybe they’ve got an 80 thousand pound mortgage on it, so they can’t sell it for what it’s worth cause they’re in negative equity. So they’re prepared to
wait to get more money, like years in the future, especially because you’re
paying them money now, month to month, which more
than covers their mortgage. So that’s just one example. I could give you loads more as to why would people do lease options. How much does a lease option cost? Depends on the complexity, but I’m going to say a typical, a decent lawyer doing you a
proper lease option contract six to eight hundred pounds, would be typical in my experience. It can be more, if it’s a big commercial
property in the millions and you’ve got to check this,
that, and the other thing, it could be a lot more but on like a bog standard house, six to eight hundred pounds. How much does it cost? Well, whatever you can agree. I’ve done lease options for a pound, you’ve got to pay something, so I’ve paid a pound to the
person giving the lease option. I’ve also done lease options
for 10 thousand pounds, depends how valuable it is, depends how soon you’re going to do it. So there is no correct price. So the final tip I want to give you is before you get all this stuff written down and sent off to the lawyer, sit down with whoever you’re
doing the lease option with and do a heads of terms. What’s that? Well it’s a one or two page document, just bullet points, in English, not legal English, in real English. I am going to pay you 500 pound a month. I have got the option to buy this thing for 86 thousand pounds,
within the next 10 years. That’s the term, now,
of the option, 10 years, could be five, could be 10, could be a hundred if you want. It’s whatever you agree but you need to agree to things like whose responsible for the maintenance, if the boiler breaks,
whose paying for that. Is there any special things like, well, you know, I’m renting the house but I don’t want the garden or I’m renting the house
cause I do want the garden. Cause I want to have a
building plot in the garden. So you need to agree
whatever you want to agree. Then you both sign the heads of terms, then you send it off to
your respective lawyers, and they’ll come back with
some sort of option agreement. Happy days. Now in a future episode of “Money Matters” I want to talk about a very
specific type of lease option, which can make you an absolute fortune. You’ll have customers
queuing up at the door and you’ll be doing a
fantastic social service. You’ll be helping people to
get onto the housing ladder that couldn’t otherwise do it. So this is where somebody
leases or rents the property for you, almost like a regular buy to let. But they’re doing it
cause they want to but it in five or seven years time. So I’m not going to go into it now, cause it’s a complete separate subject for another “Money Matters”. But I just want to give you the heads up that it’s coming. As always, I hope you found this “Money Matters” interesting. You’ve been wonderful. I’ve been Paul and I’ll see you next time. Thank you very much. If you’ve liked it,
please literally like it, subscribe to the channel, get your friends to do the same. You’ve been wonderful. I’ve been Paul. See you next time. Bye bye.