Property lease options are the new favourite investment strategy gripping the residential property investment world with excitement – but do they really work?

From researching a property options book, it seems little tangible proof is available to show the investment strategy is a win-win for everyone involved.

The research included talking to a number of acclaimed ‘property options gurus’ and two legal firms working in the market.

The conclusion is a homeowner could have a lot to lose when entering a property lease option deal.

The typical investment lease option is a ‘sandwich option’.

In this strategy, the investor runs a double deal.

On the one hand, a £1 is typically paid to the homeowner for an option to buy the property at a fixed price at an agreed date in the future – this explains those ‘Buy a house for £1’ ads.

In return for having been granted the option, the investor agrees to pay the mortgage and cover any maintenance costs on the property during the option period.

With the other hand, the investor seeks a tenant buyer who also takes up an option to buy the property at a fixed date in the future – generally the same one as the investor has agreed with the owner.

The aim is to put a tenant in the home to pay the mortgage and cover the running costs.

The profit for the investor comes from the option paid by the tenant buyer, often at 3%-5% of the agreed property purchase price.

The investor will also negotiate a higher purchase price for the tenant buyer than the price paid to the homeowner.

Sometimes the term ‘positive cash flow’ comes in to the deal.

Positive cash flow means persuading the homeowner to subsidise the mortgage by paying the investor a monthly contribution and agreeing a rental payment with the tenant buyer that exceeds the mortgage repayment.

But here come the risks and where it all goes wrong.

• The tenant buyer or the investor can drop out of the deal at any time. The investor will often try and enforce a penalty on the tenant buyer, but if the tenant buyer has no money, it does not really matter what the penalty amounts to.
• If either walk away the owner is left with a mortgage that is probably too much too pay or he or she would not have moved in the first place
• If the option is not ‘in the money’ for the owner or tenant buyer, the deal is likely to fail. ‘In the money’ for the owner is if the sale price is more than the valuation and vice versa for the tenant buyer.
• The tenant buyer probably has a poor credit record and won’t be able to raise the finance to complete the option purchase. Generally, the term is not long enough to give sufficient time for someone to heal their past bad credit
• The investor has not accounted for tax on the lease option premium. I have not seen a single word in any literature promoting a lease option firm that warns about the tax consequences for the investor. In discussing lease options with the ‘gurus’, they clearly do not understand the tax issues for the investor or the homeowner who has vacated the property.

A solicitor is unlikely to advise a homeowner to sign a lease option deal that could lead to them losing their property if the mortgage was not paid. That’s why many promoters of property lease option schemes recommend their own solicitor.

A property lease option can be bad news and a financial gamble for everyone taking part.

The homeowner and tenant buyer are gambling on the property value at the end of the option period.

The investor is receiving money from a homeowner and a tenant buyer who are both likely to be struggling for cash and in a vulnerable financial situation.

The investor is also gambling that the deal will complete.