A property expert is warning tenants to stay away from landlords and companies that provide unregulated schemes offering the chance to rent a property with an option to buy it.
David Lawrenson of Lettingfocus.com, a private rented sector consultant, has branded these schemes a ‘disaster waiting to happen’.
Property investment clubs are marketing property lease option schemes to buy to let investors as the new way to make money out of property with less than full financial commitment, after finance for other ‘no money down’ schemes such as same-day remortgaging dried up.
A lease option contract gives the tenant the right, but not the obligation, to buy a property at a set price at an agreed future date.
Tenants pay an upfront deposit of around two to three percent of the property price, which is put towards any future purchase.
Tenants then pay monthly rent as well as monthly payments towards the purchase of the property.
However Lawrenson feels these schemes have a number of pitfalls, with the majority of the risk stacked on the side of the tenant.
He explained: “The danger is that the tenant turned possible buyer has no real security at all over the property.”
The lease option is only valuable if house prices rise, he added, while the initial deposit and the monthly payments are non-refundable.
Tenants who miss or fall behind on their monthly payments will breach their lease option contract.
If arrears are not recovered then the landlord or the lease option company has the right to evict the tenant and forfeit the contract.
Get-rich-quick gurus are also suggesting that buy to let investors combine a number of property lease option schemes into ‘sandwich lease options’.
Under the sandwich schemes, investors buy properties with a lease option from a distressed seller then find a tenant to purchase the same property with a lease option on similar terms but at a higher value.
When the tenant exercises his option to buy the investor will also exercise his option and profits on the difference between the values of the option contracts.
