Property Strategy: Purchase Lease Options and Purchase Options
This is a relatively new strategy for residential property, although it has been used for many years in commercial property and property development.
A purchase option gives the buyer the right to purchase the property at a specific price within a certain timeframe. This option is normally created by a written agreement between the buyer and the seller. The buyer must pay an option fee to the seller, which is normally non-refundable. If the buyer decides to exercise the option, the option fee will be deducted from the final purchase price. If the buyer decides not to exercise the option, the option fee will be retained by the seller.
Purchase Lease Options (Rent to Purchase/Rent to Own)
A purchase lease option (rent to purchase) allows the buyer to rent the property for a period of time with the option to purchase the property at a specific price. This agreement is normally set for a fixed term and in some agreements the monthly rent payments will be credited towards the final purchase price. The agreement prevents the owner from selling the property to a third party while the option is in place. If the buyer decides not to purchase the property at the end of the rental period, the option to purchase will expire and the buyer will not be entitled to a refund.
Purchase options and purchase lease options (rent to purchase) allow the buyer to secure the property without having to pay the full purchase price upfront. This can be an advantage for buyers who do not have the cash available to purchase the property outright.
Property sales can take months to go through the legal process, so this could be a faster option. It can also work well if the seller has little to no equity and selling would leave them out of pocket.
In short, this strategy could be advantageous if the seller is in a hurry to sell but does not want to accept a lower price.
Predicting the future is difficult and the option price agreed now might produce a big discount for the buyer – losing out on the sale uplift is potentially a downside for the seller. There is also the risk that the buyer may not exercise the option, leaving the property unsold.
Heads of Terms in the Contract
The contract should include details such as:
- Name and address for both the buyer and seller;
- The property’s address;
- The agreed option fee which must be at least £1;
- The amount for which the property can be purchased;
- The length of the option period;
- Monthly lease (if applicable); and
- Any special terms and conditions.
We recommend using a solicitor and taking legal advice to agree the contract details.
Things to Check
Buyers should check if the mortgage lender will consent to letting the property as this may affect the agreement. Additionally, buyers should check the cost of the option and the typical length of the option period, which is usually between 3 and 5 years.
Special CGT rules apply for both the grant and the exercise of an option.
Please do not hesitate to contact HWB to discuss the tax and commercial considerations of using this property strategy: Tom Young on 023 8046 1254.