Options are versatile and powerful legal instruments which are changing the way residential property is bought, held and sold in the UK.

Put simply, options are written agreements that give the holder choice or freedom. Depending on the wording in the document, the owner gives exclusive freedom to buy, use or sell the property, or a combination of these freedoms. If the buyer chooses to buy whilst the option is in place, the seller must sell. That is the essence of an option.

There are six essential ingredients of Option Agreements:

1. willing seller;
2. written document;
3. specified period of time;
4. option fee;
5. purchase price; and
6. willing buyer.

Property options fall broadly into three categories: purchase option; lease options, and double (or sandwich) lease options. All are potentially useful to landlords.

A purchase option is often short-term and grants the holder the freedom to buy the property at an agreed price within a specified period of time.

A lease option is a purchase option with the added freedom for the holder to lease or use the property during the option period.

A property owner may grant a lease option to a tenant buyer, (a tenant who also has an option to buy), so allowing him or her time to save a deposit, arrange finance, add value or wait for the property to appreciate. The tenant buyer can choose the best time to ‘exercise the option’. Serving notice in this way obligates him or her to complete the purchase, usually with a traditional mortgage. This is known as ‘rent to own’.

A double lease option amounts to two lease option agreements running at the same time. The property owner grants an investor a lease option and the investor grants a second option to a tenant buyer. This effectively means the investor can control property and even sell it without owning it.

Instead of increasing his or her personal debt and liability, option holders who take control of property before it is bought will simply make a regular payment to the seller or pay the mortgage direct on the owner’s behalf, effectively taking over the existing finance.

Investors can have the satisfaction of helping those in need; either those who need to be free of a property which has now become a liability due to relocation, relationship breakdown and other pressing reasons; or those who are forced to make new housing arrangements because they cannot maintain mortgage repayments themselves.

Options are not without risk – but the risk is generally limited to the option fee paid and any costs incurred during the option period. In many cases options can create positive cash flow, since the monthly payments to the seller or mortgage provider are usually lower than payments taken as rent. If property prices increase, the option holder stands to benefit substantially.

Property options in practice

Option agreements can provide relief for homeowners in many situations. Take Ms D and her partner. They own a two-bed semi with a conservatory and well kept gardens in a good part of County Durham but had moved 40 miles away to settle in a rural location. They were unable to sell the house. Concerned about vandals and burglars their quality of life was suffering. Unwilling to become landlords, they were paying £490 a month for an empty house.

Rather than allowing the situation to spiral out of control, they granted a 48 month lease option with the purchase price set at £97,000; less than the marketed sale price. The option holder contributed £300 a month, which covered the interest on the mortgage. An excellent tenant was found for the property.

The investor benefits from £120 profit a month.

The option holder intends to add the property to his portfolio when the market recovers. If it does not he can negotiate an extension with the owner, or simply allow the option to lapse or expire. If the option is not extended, the property will be returned to the owner in excellent condition.

The investor will have benefited from the cash flow but will sacrifice the cost of the option plus any expenses incurred. If the market moves up, he will be able to buy an outstanding property at a considerable discount.

Landlords looking to exit the market can lease option their property to another investor, effectively attaining instant relief and freedom from an investment which was draining them.

Rent to own goes a step further. It is a simple arrangement allowing a tenant to live in the property, paying rent in the usual way. The main difference is that the tenant has a legal document giving him, or her, the right to buy the house within an agreed time period at a set price. Tenant buyers tend to be people who can’t get a mortgage immediately, or don’t yet have the needed deposit, but have a strong prospect of securing finance in the future. The money paid when they move in, together with the monthly instalments, goes towards creating a sizeable deposit.

Imagine you own an investment property which owes you £100,000 and the value now is closer to £85,000. With an option you can set the future purchase price (to be paid within, say, 36 months) at £100,000. When your tenant buyer moves in you collect an option Fee of 3 to 5 per cent of the agreed purchase price; collect market rent and monthly instalments of up to 20 per cent of the rent. When the tenant buyer decides to exercise his or her option and buy, the option fee and monthly instalments become the purchase deposit.

Selling to a tenant buyer in this way has many benefits, not least of which is the option fee paid when the tenant buyer moves in and the continuing rent. Late payments and void periods are extremely rare.

The responsibility for day to day maintenance lies with the future buyer who will take pride in his or her home and is likely to be willing to make improvements. This home owner mindset safeguards the investor’s cash flow and frees him or her to focus on other aspects of his or her business.

Option agreements are changing the way many are buying and selling property in the UK. They can be used to control a substantial portfolio without the need for personal mortgage debt or liability. Hard pressed landlords can re-organise their finances and transform portfolios. Through rent to own, property options are opening doors for potential homeowners when finance is not readily available.

In short, these simple yet powerful strategies may well be an option you can’t refuse.