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NO MORTGAGE,
NO DEPOSIT,
NO PROBLEM!
By John Lee & Vincent Wong
STEP-BY-STEP GUIDE
TO LEASE OPTIONS
Home Study Course
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About the authors
John Lee started in property at the age of
21 and has bought over 154 properties for
himself and for other investors. His goals
were to never work again, become a full
time entrepreneur and owns a Lamborghini.
He achieved this at the age of 27. John is
also a property mentor, inspirational
speaker and has helped thousands of like-minded people achieve
their property goals.
John is a property expert on Inside Property Radio, Your Property
Network Magazine, co-host on Loveproperty.org, founder of
propertycow.co.uk, Founder of Deal Closer, and founder of his
property buying company Complete In 28 Days Ltd.
John’s claim to fame was when he landed a part in the hit TV show
“Little Britain”.
John Lee is known for his unique and creative negotiation style that
has contributed to his multi-million pound portfolio. To find out
more about John do a search on You Tube for John Lee.
Vincent Wong is the founder of Network Property Buyers and
Network Property Investment.co.uk.
A well respected figure in the BMV circuit, Vincent
has generated more than 30,000 below market
value property leads in the last 24 months and
helped hundreds of investors buy properties with
little or no money down.
Apart from his own multi-million pound property
portfolio and expertise in internet marketing, Vincent’s specialty is
acquiring properties using lease options.
He and John Lee have taught many investors how to buy properties
using no mortgage and deposit in their office in Milton Keynes.
Find out more about Vincent’s below market value leads and lease
options course at www.networkpropertyinvestment.co.uk.
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Contents 1. How to Use this Home Study Course .......................................... 9
1.1. What’s in the Home Study Course? .................................... 9
1.2. Successful Learning ........................................................... 10
1.3. Mindset ............................................................................. 10
Video One (mindset) ............................................................... 10
1.4. Below Market Value Investing .......................................... 10
1.5. Why Do We Want to Do Lease Options? .......................... 11
1.5.1. The Credit Crunch ..................................................... 11
Video 2 (The Advantages of Using Lease Options) ....................... 12
http://www.wealthdragons.co.uk/homestudyvideo2.html ......... 12
Exercise One.................................................................................. 13
1.6. Objectives for This Course ................................................ 14
2. What’s a Lease Option? ............................................................ 15
2.1. BMV vs. Lease Options ...................................................... 15
2.2. It’s All about Terms ........................................................... 15
Video 3 (The 3 Value Components of Lease options) ................... 15
http://www.wealthdragons.co.uk/homestudyvideo3.html ......... 15
Exercise 2a .................................................................................... 16
Exercise 2b .................................................................................... 16
2.3. The Two Things that Make Up a Lease Option ................. 17
2.4. The Option ........................................................................ 17
Audio One (Futures & Options) .................................................... 18
2.5. Some Jargons .................................................................... 18
Exercise 3a .................................................................................... 19
Exercise 3b .................................................................................... 20
2.6. Call & Put Options ............................................................. 20
2.6.1. What’s a Call Option? ............................................... 20
2.6.2. Example of a Call option ........................................... 21
2.6.3. What’s a Put Option? ................................................ 21
2.6.4. Example of a Put Option ........................................... 21
2.7. What Type of Option is in a Typical Property Deal? ..... 22
2.8. In the Money & Out of the Money ................................... 22
2.9. An Option Application – Purchase Option ........................ 23
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2.9.1. What Do You Use a Purchase Option For? ............... 23
2.9.2. Purchase Option Sample ........................................... 24
2.10. The Lease ...................................................................... 25
2.10.1. Some Questions about Controlling Cash Flow .......... 25
2.10.2. You Need a Legal System .......................................... 26
2.11. The Management Model .............................................. 27
2.11.1. The Management Legal System ................................ 27
2.11.2. The Tenancy Agreement ........................................... 28
2.11.3. The Management Fee ............................................... 28
2.11.4. Who Pays Who? ........................................................ 28
2.11.5. The Management System Paperwork ....................... 28
2.11.6. The Management Agent’s Responsibilities ............... 29
2.11.7. The Seller’s Responsibilities ...................................... 29
2.11.8. Other Important Features ......................................... 29
Exercise 4 ...................................................................................... 30
2.12. The Power of Attorney .................................................. 31
2.12.1. What is the Power of Attorney? ............................... 32
2.12.2. Why Do You Need the Power of Attorney? .............. 32
2.12.3. Abusing the Power of Attorney ................................ 32
2.12.4. Limited Power of Attorney ........................................ 32
2.12.5. Full Power of Attorney .............................................. 33
2.12.6. The Consequences of Not Setting the Power of
Attorney up Correctly ............................................................... 33
2.13. Legal Clauses ................................................................. 33
2.14. Searches ........................................................................ 34
2.14.1. Why Carry Out Legal Searches .................................. 34
2.14.2. What Searches Should We Carry Out? ..................... 35
2.14.3. Other Searches .......................................................... 35
2.15. Land Registry ................................................................. 35
2.16. The Seller’s Legal Advice ............................................... 36
2.16.1. Undue Influence ........................................................ 36
2.16.2. The Seller Wants to Use Family Solicitor .................. 37
2.16.3. Handling the Seller’s Objections with Solicitors ....... 37
2.16.4. A Magical Phrase ....................................................... 38
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Exercise 5 ...................................................................................... 38
2.17. The Role of the Mortgage Company ............................. 39
2.17.1. The Lender’s Perspective .......................................... 39
2.17.2. Notifying the Mortgage Lender about the Option .... 39
2.17.3. Consent to Let ........................................................... 39
2.17.4. The Financial Services Authority (FSA) ...................... 40
2.17.5. Repayment or Interest Only? .................................... 40
2.17.6. Who Should Speak to the Lender?............................ 40
2.17.7. Mortgage Arrears ...................................................... 41
2.17.8. What if the Seller Needs cash? ................................. 41
2.17.9. Changing the Direct Debit ......................................... 41
Exercise 6 ...................................................................................... 42
3. Granting an Option to Your Tenant .......................................... 43
3.1. Why Would You Grant an Option to Your Tenant? .......... 43
3.2. How Do You Get Started? ................................................. 43
3.3. Why Would a Tenant Pay “Above the Odds” to Live in a
property? ...................................................................................... 44
3.4. Why Would an Investor Grant an Option Whilst Having a
Mortgage? ..................................................................................... 44
3.5. Sandwich Options ............................................................. 45
3.6. Rent to Own Scheme ........................................................ 45
3.7. The Risks of Rent to Own and Sandwich Options ............. 47
3.7.1. Back to Back Deals .................................................... 47
3.7.2. The Timing of the Market ......................................... 48
Exercise 7 ...................................................................................... 49
3.8. Exercising your Options .................................................... 50
3.8.1. Give Notice to the Seller ........................................... 50
3.8.2. What If I Can’t Get Hold of the Seller? ...................... 50
3.8.3. The Seller is Not Co-operating .................................. 51
3.8.4. If this is a Sandwich Deal ........................................... 51
4. Where to find Lead Options Leads ........................................... 52
4.1. You are Lucky! ................................................................... 52
4.2. Lead Conversion ................................................................ 52
4.2.1. Raw Ingredients ........................................................ 52
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4.2.2. Probability vs. Skills ................................................... 53
4.3. Where to Find Leads ......................................................... 53
4.3.1. Other Investors’ Unwanted Leads ............................ 53
4.3.2. Property Networking Events ..................................... 54
4.3.3. Online Property Forums ............................................ 54
4.3.4. Local Investors / Developers ..................................... 54
4.3.5. Internet Marketing .................................................... 55
4.3.6. Online Advertising Campaigns .................................. 56
4.3.7. Leafleting................................................................... 60
4.3.8. Newspaper Classified Ads ......................................... 61
4.3.9. Solicitors, Brokers & Agents ...................................... 62
4.3.10. Debt Management Agencies ..................................... 62
4.3.11. Buying Leads from Lead Sellers ................................. 63
4.4. Copywriting ....................................................................... 68
Exercise 8 ...................................................................................... 70
Answers on page 102 .................................................................... 71
4.5. Critical Success Factors ..................................................... 72
Video Four ..................................................................................... 72
Exercise 9 ...................................................................................... 72
5. Selling the Idea of Lease Options to Sellers .............................. 73
5.1. Negotiation ....................................................................... 73
5.2. Negotiation vs. Consultation............................................. 74
5.3. Where Do I Begin? ............................................................ 74
5.3.1. Which Stage am I at? ................................................ 75
Video 5 Wealth Dragons Deal Closer Quadrant ..................... 75
Exercise 10 .................................................................................... 75
Once you have identified your skills level, your goal is to move
towards The Ultimate Deal Closer. ............................................... 75
Video 6 Wealth Dragons Motivation Triangle ........................ 76
Exercise 11 .................................................................................... 76
Audio 2 (How to Negotiate a Lease Options Deal) ................. 77
6. Lease Options Strategies ........................................................... 78
6.1. Your Objectives ................................................................. 78
6.2. Deal Structuring ................................................................ 78
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6.3. Seller’s Situations .............................................................. 78
6.3.1. Strategy One – Equity Available ................................ 79
6.3.2. Strategy Two – Little, No or Negative Equity ............ 81
6.3.3. Strategy Three – Part Cash Part Option .................... 84
6.3.4. Part Now Part Later................................................... 85
Video 7 Part Now Part Later................................................... 85
7. Advanced Options Strategies .................................................... 86
7.1. Identifying Option Opportunities ...................................... 86
7.2. Reverse BMV Purchase ..................................................... 87
7.3. Jim’ll Fix It .......................................................................... 87
Our paper profit = £10,000 ........................................................... 89
7.4. First Time Buyers............................................................... 89
7.5. Homes under the Hammer Buyers ................................... 90
7.6. Tenant Buyers ................................................................... 91
7.7. Standard Buy to Let........................................................... 93
7.8. Flip the Option to Investor ................................................ 94
7.9. HMOs ................................................................................ 96
7.10. Struggling Landlords ..................................................... 97
7.11. Buy to Sell ..................................................................... 98
Answers for Exercises ..................................................................... 100
Exercise 1 .................................................................................... 100
Exercise 2a .................................................................................. 100
Exercise 2b .................................................................................. 100
Exercise 3a .................................................................................. 100
Exercise 3b .................................................................................. 100
Exercise 4 ........................................................................................ 100
Exercise 5 ........................................................................................ 101
Exercise 6 ........................................................................................ 101
Exercise 7 ........................................................................................ 101
Exercise 8 ........................................................................................ 102
Exercise 9 ........................................................................................ 102
Exercise 11 ...................................................................................... 102
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All material in this course is, unless otherwise stated, the property of Wealth Dragons Limited. Copyright and other intellectual property laws protect these materials. Reproduction or retransmission of the materials, in whole or in part, in any manner, without the prior written consent of the copyright holder, is a violation of copyright law. A single copy of the materials available through this course may be made, solely for personal, non-commercial use. Individuals must preserve any copyright or other notices contained in or associated with them. Users may not distribute such copies to others, whether or not in electronic form, whether or not for a charge or other consideration, without prior written consent of the copyright holder of the materials. Contact information for requests for permission to reproduce or distribute materials available through this course is listed below: Wealth Dragon Limited Suite 165 Milton Keynes Business Centre Foxhunter Drive Linford Wood Milton Keynes MK14 6GD
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Congratulations for taking the steps to learn about using this
immensely powerful instrument called a lease option to invest
in properties!
We believe if you apply the principles and utilise the practical
tools we’ve provided in this manual, you will look at property
investment with a completely different perspective and
overcome all the adverse market conditions that we’re
experiencing today.
This could change your life!
1. How to Use this Home Study Course
1.1. What’s in the Home Study Course?
This Home Study Course is based on interactive learning. It
has been designed to accelerate your learning through the use
of:
This manual
Links to web videos
Link to web audio
Exercises
The manual has been indexed in such a way that you may
reference different sections at any time.
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1.2. Successful Learning
We believe there are 5 critical success factors in property
education:
1. Understand the concepts
2. Adjust your mindset
3. Familiarise with the tools
4. Conquer your fear
5. Do it!
Undoubtedly property manuals and courses from reputable
authors and investors will guide you in the right path but
unless you set yourself goals and take action, it would just be
a waste of your money and worse, time!
1.3. Mindset
Video One (mindset)
Go to this link now to watch the video
http://www.wealthdragons.co.uk/homestudyvideo1.html
1.4. Below Market Value Investing
The knowledge you’re about to gain from this course is based
on our many years of trials and tribulations in property
investment.
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We’ve made the assumption that you already have some basic
knowledge of investing in properties at below market value
(BMV) and we aim to be concise and informative.
If you’re completely new to property investment and wish to
know more about the background of investing BMV, you may
benefit from the Wealth Dragons Property Millionaire
Mentoring Programme
(www.WealthDragons.co.uk/wealth.htm).
If you have any specific questions or feedback, please send an
email to [email protected].
One final important point is that the information presented in
this manual is designed for education purposes only and we’re
not regulated by the Financial Services Authority.
So you want to learn about investing in property without using
mortgages and doing valuations? Let’s start!
1.5. Why Do We Want to Do Lease Options?
1.5.1. The Credit Crunch
The credit crunch has transformed the dynamics of the whole
property market.
As far as property investors are concerned, what worked
previously is no longer applicable in the current climate.
So what are the problems being encountered by investors
today?
Here are some examples:
1. Not being able to get a mortgage
2. Surveyors down-valuing properties
3. Lenders withdrawing the mortgage offer
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That’s true if you’re going into property investment for the
first time or already an experienced investor who wishes to
expand his or her property portfolio.
All lenders have since changed their lending criteria. If you’re a
first-time buyer, forget about getting a buy-to-let mortgage.
Most lenders will refuse you cold in the current climates.
What about experienced landlords with a sizable portfolio?
The answer is no, even if they have a perfect credit score and
never missed a loan repayment! Who would have thought
that?
We’ve seen many mortgage applications that were initially
approved but subsequently withdrawn by lenders just before
completions at the 11th hour!
As a result, many lives, both sellers and buyers alike, have
been jeopardised by this irrational underwriting process.
These are typical knee-jerk reactions from banks in a state of
panic – woes brought on by their irresponsible and
incompetent lending practices in the first place.
So is not being able to get a mortgage the main reason why we
should do lease options?
Video 2 (The Advantages of Using Lease Options)
http://www.wealthdragons.co.uk/homestudyvideo2.html
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Exercise One
After seeing Video 1, write down up to SEVEN reasons why Lease Options
are fundamentally better for acquiring properties than using mortgages:
#1
#2
#3
#4
#5
#6
#7
Answers on Page 100
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1.6. Objectives for This Course
• How to buy a property using lease options in the UK
• The different strategies for structuring deals and
making them stack
• How to use options to get rid of unwanted properties
• Learn stuff that most experts wouldn’t have personally
experienced
• How to sell the idea to sellers
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2. What’s a Lease Option?
2.1. BMV vs. Lease Options
A lease option is an instrument through which one can control
a property without using a mortgage.
Here are the differences:
When an investor controls a property using a mortgage; if the
terms of the mortgage are breached, the investor risks being
repossessed.
When an investor controls a property using a lease option; if
the terms of the mortgage are breached, the owner (seller)
risks being repossessed.
Traditionally, investors would access a property only in terms
of the price.
2.2. It’s All about Terms
With lease options, investors would look at the terms, which is
comprised of three value components.
In other words, if one component in a deal is lacking, it could
be compensated by the other two.
Video 3 (The 3 Value Components of Lease options)
http://www.wealthdragons.co.uk/homestudyvideo3.html
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Exercise 2a
List the THREE value components that make up a lease option:
Component #1
Component #2
Component #3
Answers on page 100
Exercise 2b
Answer the following questions by filling in the blanks:
Q. What is the difference between “equity” and the” intrinsic value”?
A. Equity is the difference between the ( ) and ( ).
Intrinsic value is the difference between the ( )
and ( ).
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Q. If a property has no intrinsic value, then how would you increase its
value in a lease option deal?
A. Maximise the ( ) and prolong the ( ).
Answers on page 100
2.3. The Two Things that Make Up a Lease
Option
A lease option is split into two parts:
The OPTION that controls the PRICE
The LEASE that controls the CASH FLOW
The owner gives you the benefits associated with a mortgage
but without the risks.
2.4. The Option
This is the first part of a lease option.
By definition:
“An option is a contractual agreement that grants the bearer
the right but not the obligation to purchase or sell an asset at
a specific price at anytime within a specific time period.”
It has been used extensively in property, equity and
commodity trading to hedge risk.
The point to remember is that it gives the bearer the right but
not the obligation to exercise it.
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So how does it control the price and how does it hedge risk?
Listen to the following audio.
Audio One (Futures & Options) Click this link and listen to the difference between futures and
options
http://wealthdragons.s3.amazonaws.com/continuity/pmm/futures.mp3
2.5. Some Jargons
Optioner – the person who grants the option also known as
the underwriter. In property, it is the owner who wants to sell
the property.
Optionee – the person who is granted the option or the
investor.
Premium – also known as the option fee. This is the price paid
by the optionee to the optioner for the option. In other words,
by paying this fee, the optionee will have the privileges
attached to the option.
Exercise price – also known as strike price or option price, this
is the eventual purchase or sale price agreed in an option
today.
Asset price – this is the actual market price of an asset
determined by supply and demand at any given time. One
needs to compare the option price with the asset price to see
if it is in the money (asset price greater than the option price)
or out of the money (asset price less than the option price).
Option period – the period during which an option can be
exercised.
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In a European option, the option may only be exercised at the
end of the option period whereas in an American option, it
may be exercised anytime during the option period.
It is important to note that most property options are based
on American Options. Don’t worry too much about that for
now if you don’t understand it. We’ll show you their
applications later on in the course.
Expiry – the end of the option period.
Exercise 3a
Please try to remember the definition of an option and then fill in
below.
What is it? (verbal agreement / written contract / sales letter)*
*Delete as appropriate
From whom to whom?
The what?
But not what?
To do what?
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At a specific what?
When?
Answers on page 100
Exercise 3b
*Delete as appropriate
The person who receives the option has *the obligation / the right
The person who gives the option has *the obligation / the right
Answers on page 100
2.6. Call & Put Options
2.6.1. What’s a Call Option?
A call option gives the bearer the right but not obligation to
buy an asset whereas a put option gives the bearer the right to
sell an asset at a specific price.
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The bearer of a call wants the asset price to go up and exceed
the strike price.
2.6.2. Example of a Call option
For example, if you have an option to buy a property for
£100,000, naturally you want the market price to exceed
£100,000, to say, £130,000 so you can exercise your right to
buy it at the lower price and make £30,000 gross profit.
This is a typical property call option.
2.6.3. What’s a Put Option?
The bearer of a put wants the asset price to go down below
the strike price.
The reason is that a put bearer has the right but not the
obligation to sell an asset at a fixed price.
2.6.4. Example of a Put Option
Here’s an example of an equity share option.
If you own company A shares and you speculate its share price
to go down in 3 months time, you can buy a 3-month “put”
that will allow you to sell your share at say, £2 per share in 3
months time (equity options are European options where you
can only exercise on the expiry date).
If in three month’s time the actual share price falls to, say
£1.20, you can exercise your right to sell your share A in the
open market at £2. You then buy the share back at £1.20 and
make £0.80 profit, minus the option fee you paid initially.
In reality, you don’t have to own company A shares in order to
buy a put option. You simply purchase the option from the
22
market through your broker and you’ll simply gain or lose the
difference.
This is the concept of trading in margin or entering into a
Contract of a Difference.
Here’s a pseudonym for you – CB and PS
Call = Buy
Put = Sell
2.7. What Type of Option is in a Typical Property
Deal?
Don’t worry if all this sounds a bit complicated. You may be
pleased to know that nearly all property options are call
options.
In other words, you just agree on a price with a vendor as your
right but not the obligation to buy the property and hope the
market value will go above and beyond that.
Later on in the course, we will show you how a put option is
relevant in property.
2.8. In the Money & Out of the Money
When the market price relative to the strike price is favourable
to the bearer of an option, the option is said to be in the
money. Otherwise, the option is out of the money.
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For example, if you have an option to buy a property for
£100,000 exercisable within 5 years but today, the property is
worth £90,000, then your option is out of the money.
2.9. An Option Application – Purchase Option
A purchase option agreement is typically used to lock in a
seller to give you exclusivity to purchase a property or piece of
land.
It is widely used for straight-forward purchases involving
mortgages, legal conveyancing and completion.
In this agreement, you have neither right to the rentals of the
property nor any involvement with the seller’s mortgage.
When you use a purchase option agreement, your objective is
to use the option period to carry out a number of activities
before completion, depending on the nature of your deal, and
prevent the seller from backing out of the deal in the
meantime.
2.9.1. What Do You Use a Purchase Option For?
You could use it for:
1. Completing your legal conveyancing.
2. Carrying out renovation work on the property before
getting a mortgage.
3. Securing a land deal whilst waiting for planning
permissions.
4. Obtaining compensation from the seller for any costs
incurred if the seller breaks the Agreement.
5. Assigning the deal to another investor for a fee.
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2.9.2. Purchase Option Sample
Please note that the following Purchase Option is for
educational purchase only. Do not use it without seeking legal
advice.
OPTION TO BUY PROPERTY AGREEMENT
This Agreement is made on the day of 2010
Between
• ______________ (the “Buyer”): and
• (the “Seller”).
WHEREAS:
The Seller now owns (the “Property”)
NOW IT IS HERBY AGREED SUBJECT TO VALUATION as follows:
• In consideration of the sum of £ , (the “Option
Payment”) receipt of which is hereby acknowledged by the Seller
upon execution of this agreement, the Seller grants to the Buyer the
exclusive option to buy the Property for the following price and on
the following terms (the “Option”):
Purchase price £
25
• The Option Payment will be credited against the purchase price of the
Property if the Option is exercised by the Buyer.
If, after signing this Agreement, the Seller fails to complete the sale of the
Property to the Buyer, the Seller will reimburse the Buyer with all the costs
that the Buyer has incurred including the Option Payment.
The Option Period will be for months from the date of this
Agreement (“the Option Period”). The Option shall be exercised by the service
of written Notice by the Buyer on the Seller at any time within the Option
Period.
____________________________
Signed by or on behalf of the Seller
____________________________
Signed by or on behalf of the Buyer
___________________________
in the presence of (witness)
____________________________
in the presence of (witness)
Name _______________ Name _______________
Address _______________
_______________
_______________
Address _______________
_______________
_______________
Occupation _______________ Occupation _______________
2.10. The Lease
This is the second half of the equation. The lease allows you to
control the cash flow.
A “lease” is another term for “rent”.
2.10.1. Some Questions about Controlling Cash Flow
Let us ask a few important questions to identify how to go
about controlling the cash flow of a property:
26
1. As an investor, are you renting a property directly from
the owner / seller?
2. If so, are you financing the rent out of your own
pocket?
3. If the property is to be let out to a tenant, do you have
the right to do so if you are not the owner of the
property?
4. Even if you do, do you wish to be directly responsible
for the tenant if the owner loses the property, e.g.
repossession, death?
5. How do you control the cash flow exactly?
2.10.2. You Need a Legal System
The way in which the cash flow is controlled depends
entirely on a legal system that allows you to do so
effectively whilst mitigating risk.
So referring back to the questions, it is obvious that:
We do not pay the rent out of our own pocket to
the owner, but we put a tenant in the property and
use the rent to finance the seller’s mortgage
payment.
We do not have the right to let the property out as
an investor because we do not own the property.
Therefore, the rental agreement is between the
owner and the tenant.
We do not want to be directly responsible for the
tenant if the owner loses the property. Therefore,
our capacity in the arrangement is to manage the
property on behalf of the owner.
27
We receive the rent directly from the tenant and
pay the seller’s mortgage directly. The difference
becomes our management fee or rental profit.
2.11. The Management Model
BUSINESS RELATIONSHIPS: How the key players fit together in a
property option business model
2.11.1. The Management Legal System
This system has been developed by one of the UK’s leading
commercial lawyers Alexander Lawyers LLP with over 36 years
experience in lease options (www.alexanderlawyersllp.com).
In the UK, lease option is relatively new. One important point
to remember is that in lease option, the transaction takes
place in the future, typically in 5, 7 or even 10 years.
Therefore, in choosing a solicitor to work with, it is imperative
that this solicitor is one who:
Has extensive experience and expertise in this subject
28
Can advise you on structuring your deals
Has developed the legal documents to make them
enforceable and being able to minimise risk
Can assist you should anything go wrong (legal matters
are never “black and white”!)
The diagram above shows that while the buyer has a purchase
option from the seller, he or she is now acting in the capacity
of a Management Agent on behalf of the seller.
2.11.2. The Tenancy Agreement
The Assured Tenancy Agreement (AST) is between the seller
(owner) and the tenant.
The fundamental reason for this arrangement is that legally,
the buyer doesn’t have any right to grant an AST to a tenant
when he or she is not the legal owner of the property.
Secondly, any changes in the seller’s circumstances will not
affect the buyer’s obligation to the tenant because the buyer
is only acting as the seller’s agent.
2.11.3. The Management Fee
The management fee, quite conveniently, is equal to the
difference between the rent and the seller’s mortgage.
2.11.4. Who Pays Who?
It is important that you do not allow the rent to reach the
seller and the mortgage is paid directly to the seller’s
mortgage company by the buyer for the obvious reasons to
ensure that the property doesn’t fall into arrears.
2.11.5. The Management System Paperwork
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The Management Legal System has two parts:
1. The Purchase Option Agreement
2. The Management Agreement
The Management Agreement lists out the responsibilities of
the seller and the investor.
2.11.6. The Management Agent’s Responsibilities
1. Pay the seller’s mortgage directly, irrespective of
whether the property is vacant or occupied. Therefore
a new direct debit mandate needs to be done with the
buyer’s name and bank account details.
2. Maintain the property. If there are any damages
caused by the tenant, it is the agent’s responsibility to
sought compensation from the tenant in accordance
with the terms on the AST.
2.11.7. The Seller’s Responsibilities
1. Keep in touch with the buyer and agent. The seller
needs to notify the buyer if there are any changes in
personal circumstances. It is in the best interest for the
seller to do so because the seller is still the legal owner
of the property.
2. Building Insurance. Since the seller is still the legal
owner, the building insurance needs to be in the
seller’s name. Of course the buyer may agree to
reimburse the seller for this.
2.11.8. Other Important Features
A break clause for the buyer if once the option is
exercised but the property is found to be
unmortgageable due to defects or adverse searches.
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A break clause for the buyer if the seller fails to comply
with the terms of the Option Agreement. An example
of which would be if the seller is facing insolvency or
bankruptcy and the property is being repossessed as a
result.
If the investor terminates the Management Agreement
because the seller has breached the terms, the
Purchase Option Agreement can remain valid.
The option may be exercised when a Notice is given to
any of the joint owners, whether the trust is in a Joint
Tenancy or Tenancy in Common.
Once the Notice is given in writing, the property needs
to complete within 28 days or the seller could face
legal action.
Exercise 4
After reading through the features of the Management Model, please
answer the following questions:
1. There are two parts to the Management Model in terms of legal
agreements. One part is the Purchase Option. What is the name
of the other part?
2. The Assured Tenancy Agreement (AST) is between which two
parties?
Party one:
Party two:
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3. Who does the tenant pay the rent directly to?
4. Who pays the seller’s mortgage and how?
5. If the boiler breaks down, who is responsible for getting it
repaired or replaced?
6. If the property is vacant, who is responsible for continuing to pay
the seller’s mortgage?
7. True or False - The investor can terminate the Management
Agreement and stop paying the seller’s mortgage at any time.
T/F*
*Delete as appropriate.
Answers on page 100
2.12. The Power of Attorney
This is an important topic so we need to spend a little bit of
time on it so we may understand its importance.
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2.12.1. What is the Power of Attorney?
A Power of Attorney is a legal document whereby a person
gives another person or persons the power to make decisions
with regard to their financial affairs and/or their health and
personal welfare.
2.12.2. Why Do You Need the Power of Attorney?
In a lease option deal, we recommend that the buyer should
make it a requirement that the seller should grant the buyer
the Power of Attorney.
This is to ensure that when it is time for you to exercise your
option to buy the property, you can simply do so without the
seller getting involved. The seller could be unavailable during
this time for any reason.
2.12.3. Abusing the Power of Attorney
However, it is important that the Power of Attorney is
established solely for convenience sake and not to be abused.
An example of abuse is contacting the seller’s mortgage
company to remortgage the property without notifying or
agreeing with the seller.
You need to bear in mind also that legally, the full Power of
Attorney may be rescinded by the person who granted it at
any time. In other words, the agreement is revocable.
2.12.4. Limited Power of Attorney
In Alexander Lawyers’ Management Agreement, the Power of
Attorney has been built into the contract as a clause.
This Power is limited and irrevocable.
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The limitation is that we can only enforce the exercising of
the option in the absence of the seller and quite frankly, this is
very reasonable and all that we need.
Similar to a Landlord / Tenant relationship in a buy-to-let, a
successful lease option deal requires the seller and buyer to
keep in touch and have an on-going relationship.
It is far better to resolve any issues as they arise between the
two parties rather than having to resort to taking legal
proceedings.
2.12.5. Full Power of Attorney
However, if you must incorporate the full Power of Attorney
into the deal for any reason, it is essential to run a check on
the property’s title and obtain legal advice.
By law, if more than one person owns the property, each
party, whether in a tenancy in common (each party owns a
percentage) or a joint tenancy (two joined owners each
owning 100%), should appoint a separate attorney.
2.12.6. The Consequences of Not Setting the Power of
Attorney up Correctly
If setting up the full Power of Attorney is not done properly, it
could jeopardise your deal in the future. Therefore, it is always
advisable that you ask your solicitor to manage it for you.
Therefore, the Power of Attorney is not a “stand alone”
document that you can simply ask the seller to sign in order to
waive all the rights away without taking proper procedures.
2.13. Legal Clauses
These are the special terms and conditions that add to a
standard Option Agreement once agreed with your seller.
They are what give an option agreement total flexibility.
34
A word of warning – never add anything to a legal document
without consulting with your solicitor.
Examples of clauses you may wish to add are:
A break clause to allow the buyer to terminate the
Agreement before the option expires
If the seller fails to make the monthly contribution or
fulfil certain criteria as agreed, the buyer may make
the Agreement null and void
Further monthly contributions from the seller if the
interest rate rises above a certain level
Further extension to the option period after certain
time
Provided the seller accepts your special terms and signs the
agreement, they are legally binding.
2.14. Searches
2.14.1. Why Carry Out Legal Searches
Legal searches are carried out to protect the buyer.
Unlike the standard conveyancing process, the types of
searches you decide to carry out for an option deal are entirely
up to you.
One question to ask is “do I want to nurture a deal for 5 or 10
years only to find the property not mortgageable when I
exercise my option?”
Although a full scale search is not necessary, doing some basic
searches is definitely sensible.
35
2.14.2. What Searches Should We Carry Out?
A Title Search – this reveals the identity of the seller(s),
restrictions and possible complications. By far this is
the most important search especially if the property is
held in a Trust.
An Environmental Search - If there is any problem at all
with the building or the property, it will put off future
buyers. Therefore, it is important to ascertain this from
day one.
2.14.3. Other Searches
Local authority search
Water search
Coal mining search - depending on the area
Other specialist searches depending on the property’s
location
Although all the searches should be carried out as
recommended, one thing to bear in mind is that if you decide
to purchase the property after exercising your option, all the
searches must be carried out again.
2.15. Land Registry
Once the Purchase Option and Management Agreements have
been signed by both the buyer and seller, it is imperative that
they are registered with the Land Registry by your solicitor.
The reasons for doing so are to:
1. Protect your interest in the property legally and
prevent any further interests registered by any third
parties.
36
2. Prevent the seller from remortgaging, borrowing
against or selling the property. This will show up in the
searches when solicitors carry out the searches.
Example of an option registered in the Land registry
2.16. The Seller’s Legal Advice
So what about the seller’s solicitor or legal advice?
Since it is not an actual property sale, there is no obligation
that the seller appoints a solicitor or the buyer appoints one
on behalf of the seller but it is important that you do so.
2.16.1. Undue Influence
In order to ensure that the seller does not accuse the investor
of exerting undue influence over the sale, it is imperative that
the seller uses a solicitor who is a specialist in this field.
Undue influence, in the court of law, is defined as “one person
taking advantage of a position of power over another person.”
It is where free will to bargain is not possible.
In case of dispute, if a seller can prove that the buyer had
exercised undue influence because no legal representation
had been offered to them, the option contract could
potentially be disregarded by the Court.
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2.16.2. The Seller Wants to Use Family Solicitor
If a seller does decide to consult with their own family
solicitor, it is very probable that the solicitor would advise the
seller against signing it.
The main reason is that a solicitor, who is not conversant with
such an agreement, would simply not want to bear any
responsibilities if things go wrong.
More to the point is that a normal solicitor rarely takes the
seller’s personal situation into consideration.
2.16.3. Handling the Seller’s Objections with Solicitors
Therefore, there are three ways in which you may help the
seller overcome any objections:
1. Explain to the seller that his or her solicitor is likely to
advice against signing the Agreement for the reason
stated above.
2. Help the seller understand the contents of the
Agreement so the seller feels more reassured about
signing it.
3. Reiterate the importance of doing the deal with you
and more importantly, the possible consequences of
not doing the deal given the seller’s circumstances.
It is very important to show the highest integrity when
explaining the contract to the seller, including any pros and
cons and risks from the perspective of the seller.
It’s better for the seller to understand everything from the
onset and have a realistic expectation.
There is a saying “there’s nothing to be feared, only to be
understood”.
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2.16.4. A Magical Phrase
One magical phrase you can use to ask the seller is whether
they would “appoint a divorce lawyer to handle an injury claim
from an accident.”
Lease Option is a specialist subject that needs to be handled
by a specialist lawyer.
Exercise 5
Please answer the following questions:
1. List five important roles of an options solicitor acting for the
investor:
#1
#2
#3
#4
#5
2. As far as the investor is concerned, what should be the main
purpose of using the Power of Attorney?
39
3. Is the full Power of Attorney a document that an investor can ask
the seller to sign without getting a solicitor involved? Y / N*
*Delete as appropriate
4. What is the “magical phrase or question” you could use if the
seller insists on using a family solicitor who is inexperienced in
doing lease options?
Answers on page 101
2.17. The Role of the Mortgage Company
What about the seller’s mortgage lender? Do we need to
notify them of this arrangement?
2.17.1. The Lender’s Perspective
The first thing to remember is that the mortgage lender’s
primary interest is to receive the mortgage payment each
month, irrespective of where the money comes from (except
laundered money of course).
2.17.2. Notifying the Mortgage Lender about the Option
You may be relieved to learn that it is not necessary to inform
the mortgage lender about the Option Agreement.
2.17.3. Consent to Let
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While the seller has no obligation to inform the mortgage
lender about a purchase option being granted to a buyer, the
seller needs to inform the mortgage lender if the property is
going to be let on an AST in accordance with the mortgage
terms.
Therefore, it is necessary to obtain Consent to Let.
With Consent to let, there is normally a small administrative
fee to pay and you may want to cover that cost.
2.17.4. The Financial Services Authority (FSA)
The lender rarely refuses this request unjustifiably, particularly
mortgage lending is regulated by the Financial Services
Authority (FSA) whose objectives are to ensure that borrowers
get a fair deal with their lenders.
2.17.5. Repayment or Interest Only?
If possible, the seller should encourage the buyer to change a
Repayment Mortgage to an Interest Only or even a Buy-to-Let
mortgage which would reduce the monthly payment quite
substantially.
It is not always guaranteed that the mortgage lender would
allow Consent to Let or changing a repayment mortgage to
interest only in the first instance.
If they do not, you may suggest that the FSA would get
involved and this would normally be sufficient to influence
their decisions.
2.17.6. Who Should Speak to the Lender?
It is important to bear in mind that at this stage, the seller is
still the owner of the property.
Therefore, from a practical point of view, it is easier for the
seller to speak to the mortgage lender directly and you may
need to train the seller beforehand.
41
If the seller does not wish to deal with the lender, you can let
the lender know that you have the expressed permission from
the seller to deal with them directly.
In that case, just simply explain that you are the seller’s
representative.
2.17.7. Mortgage Arrears
If the seller is in arrears (behind with mortgage payments) and
the seller is facing repossession, you should try to negotiate
with the lender to settle the arrears to avoid repossession.
Although this is not always guaranteed, we have had
experience where:
1. The lender agrees to settle the arrears by accepting a
percentage of it to stop the repossession. This could be
as low as 50% of the original amount.
2. The lender agrees to add the arrears to the overall
mortgage loan amount so they are spread over the
duration of the mortgage terms.
2.17.8. What if the Seller Needs cash?
If the seller needs a lump sum of cash to move on, it may be
possible to remortgage first. All these depend on the seller’s
credit history and the process may delay the deal.
Later on in the course, we will explore seller’s cash
requirements in more detail.
2.17.9. Changing the Direct Debit
Once the Consent to Let is obtained, the next thing the seller
should request from the lender is a new Direct Debit Mandate
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form. Do not mention anything else to the lender about doing
lease options etc.
Once the form is received, the investor (you) should fill it in
and return it to the lender. Then two things may happen:
1. The lender just accepts it and the investor will start
paying the mortgage directly from their bank account.
2. The lender will write back requesting the owner to sign
an extra form to give permission to this third party to
pay the mortgage. In that case, just do it and that will
be the end of the matter.
Exercise 6
Answer True or False *Delete as appropriate
1. The seller’s mortgage lender needs to be informed of the
Purchase Option put on the property. T / F*
2. The permission you get from the lender for letting the property
is called Right to Let. T / F*
3. When you ask the lender for Consent to let, the lender will not
always grant it in the first instance. T / F*
4. The monthly payment for a repayment mortgage is lower than
that of an interest only so it is preferable for the seller to keep
the repayment mortgage. T / F*
5. Mortgage lenders are regulated by the Financial Services
Authority (FSA). T / F*
6. The mortgage lender will always allow you to release further
funds from the equity of the property. T / F*
7. It is better for you (investor) to communicate with the mortgage
lender than the owner to do so. T / F*
8. It is possible to negotiate with the lender as regards to the
seller’s arrears to avoid repossession. T / F*
Answers on page 101
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3. Granting an Option to Your Tenant
3.1. Why Would You Grant an Option to Your
Tenant?
The idea behind granting an option to a tenant to buy the
property is that an investor may benefit more from doing so
than just commanding rent from a tenant.
The option allows the tenant the opportunity to buy your
property at a fixed price sometime in the future.
You may:
Keep the deposit from the tenant as the Option Fee. A
rental deposit needs to enter the Tenant’s Deposit
Scheme while a fee may be non-refundable
Command more rent from the tenant as rent premium
Ask the tenant to fix or maintain the property at their
own cost
Fix an exit strategy for your property
Granting an option to a tenant is the basis of a Rent to Own
scheme.
3.2. How Do You Get Started?
Before you can grant an option to a tenant, you must first have
control over this property.
If you have followed this course up till now, you will know that
an investor can control a property in two ways:
1. A mortgage
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2. A lease option
3.3. Why Would a Tenant Pay “Above the
Odds” to Live in a property?
This is a very important question to ask because no one would
pay more money than necessary just for an opportunity to
own a property.
The primary reason for doing so is if the perceived value of a
property is seen to be going up. This is typically so in a buoyant
property market.
In other words, the tenant is being granted a call option to
purchase a property and expecting the price to go up.
In a Rent to Own scheme which we will be discussing shortly, a
tenant would benefit from having an option to purchase
because:
The tenant pays the option premium as a “saving
scheme” so it may be used as the deposit for the
eventual purchase.
The tenant feels there is a sense of ownership whilst
having an option to purchase a property.
If a tenant is unable to obtain a mortgage now due to
bad credit. Renting before buying is a good way to
restore the credit score.
3.4. Why Would an Investor Grant an Option
Whilst Having a Mortgage?
Many investors, including us, have bought properties we wish
we hadn’t.
This could be due to a property needing substantial work or
being situated in an undesirable location.
45
Granting an option to a tenant who is a DIY enthusiast or
someone who wants to get on the property ladder and does
not mind being in a bad area can help you offload this
property where it would be very difficult in an open market.
We managed to offload a property that was turned into a
“cannabis factory” by unscrupulous tenants using this method!
3.5. Sandwich Options
A sandwich option is when you grant an option to a tenant
whilst having been granted an option on this property from
the owner.
The best way to illustrate a sandwich option is to explain how
a Rent to Own scheme works.
3.6. Rent to Own Scheme
Rent to Own schemes have been very popular in countries
such as Australia and the USA.
Its popularity has been fuelled by the worldwide property
boom prior to the credit crunch.
Let us look at a typical example of how a Rent to Own deal is
structured:
Rent to own scheme. An example.
A property’s market value today is £100,000.
The seller’s mortgage outstanding is £80,000.
46
You have option to buy at £100,000 within 5 years.
You grant an option to a tenant (now tenant buyer) to buy at £130,000
within 5 years.
The tenant buyer pays £2,000 (option fee) upfront and £200 per month
above market rent (rent premium).
In year 4, the market value becomes £150,000. The tenant buyer exercises
the option.
Rent premium paid so far = £200 x 48 = £9,600.
You gift £9,600 as deposit.
The tenant buyer borrows £120,400 from a mortgage company.
Your profit = £120,400 + £2,000 + £9,600 - £100,000 = £32,000
Tenant buyer’s paper profit = £150,000 - £130,000 – £9,600 - £2,000 =
£8,400
Seller’s profit = £100,000 - £80,000 = £20,000
Everyone is happy.
As explained previously, granting an option to a tenant would
only make sense if there is perceived value from the tenant in
a rising market.
47
You do not need to do a sandwich option or operate Rent to
Own in order to benefit from lease options if the timing of the
market is not right.
3.7. The Risks of Rent to Own and Sandwich
Options
While these kinds of deals are potentially very lucrative in the
right situations, there are inherent risks of which we need to
be aware.
The two main reasons that contribute to such risks are as
follows:
3.7.1. Back to Back Deals
A back to back deal is one where there are three parties
involved as in a sandwich option.
When there are more than two parties in a deal, things do get
inevitably complicated.
While the legal system for lease options mitigate the risks
from an investor, benefitting from the tenants directly
through receiving monies transfer the responsibilities of the
tenant back to the investor.
When an investor receives rent premiums or option fees from
a tenant buyer, the investor becomes responsible for this
tenant buyer if, for any reason, the seller becomes bankrupt or
gets repossessed for any reason.
Remember, once the tenant buyer exercises the option, you
become obligated to deliver it.
Therefore, a sensible way to approach this is to make sure
there are funds available to compensate the tenant buyer if
you cannot deliver the property once the option is exercised
by the tenant buyer.
48
Another risk to be aware of is that once the tenant buyer
exercises the option, you exercise your option with the original
owner and become obligated to buy it.
At this point, there is always a chance that the tenant buyer
fails to complete on the purchase.
This could be due to the mortgage being withdrawn in the last
minute by the mortgage lender or other unforeseen
circumstances experienced by the tenant buyer.
Therefore, if you are not in the position to obtain a mortgage
or arrange for finances to buy the property from the seller,
you could potentially be sued.
Fortunately, buying the property with a mortgage is only one
of the many exit strategies that we can use. We will discuss
other exit strategies later on in the course.
3.7.2. The Timing of the Market
If a call option is granted to a tenant buyer for a large fee plus
the rent premiums, the tenant buyer would expect the market
value of the property to exceed that of the option price so
they may exercise the option.
If this call option has been granted during a flat or falling
market, then the above might not materialise and the tenant
buyer could accuse the investor for mis-selling.
Therefore, the timing of the market is crucial whenever you
grant an option to a third party.
Rent to Own schemes had been very successfully implemented
overseas because the property market worldwide had been
experiencing an uninterrupted “bull run”.
When the market seemed to be only going up everywhere as
in the UK, property investment was very forgiving of mistakes.
49
So in any back to back deals, all parties were profiting and any
potential risks seemed to have been compensated.
While the property market is still in a fragile state post credit
crunch, it is imperative that we approach back to back deals
with extreme caution.
Exercise 7
Please answer the following questions:
1. What are the three things that an investor can command from a
tenant in order to benefit from a Rent to Own scheme?
#1
#2
#3
2. Name one reason why a tenant would pay above the market
rent to gain an option to buy a property from an investor?
3. Answer True or False
When the market is flat or falling, it is not always a good idea to grant a
call option to a tenant T / F*
*Delete as appropriate
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4. How would you minimise each of the following two risks in a
back to back deal?
The tenant buyer exercises the option but you cannot deliver the
property
Solution:
The tenant buyer accuses you of mis-selling a Rent to Own scheme
Solution:
Answers on page 101
3.8. Exercising your Options
3.8.1. Give Notice to the Seller
When it is time to exercise your right to buy a property, you’ll
need to serve a Notice on the seller.
If you have been in touch with the seller throughout the terms
of the option, then this should be straight forward.
In cases of joined ownership, if you have included it as a clause
in your Option Agreement, then you may simply serve a Notice
to any one of them to proceed with the sale.
3.8.2. What If I Can’t Get Hold of the Seller?
If you can’t get hold of the sellers, then you can exercise your
Power of Attorney as discussed.
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3.8.3. The Seller is Not Co-operating
Although an Option Agreement is a legally binding document
signed by both parties, any problems may result in you
attending court.
One example is that the seller refuses to honour the
Agreement because their circumstances have changed. They
might not be so ready to give their property up so swiftly.
This is the time when you are happy you had implemented all
the necessary procedures with your solicitor at the onset of
the Option Agreement, such as appointing a solicitor to act on
behalf of the seller.
Also if you had incorporated some “profit share” incentive into
the deal, this could be avoided all together.
3.8.4. If this is a Sandwich Deal
As explained, there is a risk that your tenant buyer cannot
complete on the deal after you have given Notice to the
original seller.
There are different ways in which you could minimise these
risks:
1. Explain the situation to the seller and hope the seller will
revoke the Notice.
2. Exercise the option only after seeing the tenant buyer’s
mortgage offer.
3. Exercise your option with the seller conditional to the tenant
being able to complete on the purchase.
4. Ask the tenant buyer for a deposit.
5. Have sufficient funds from the option premium received from
the tenant buyer for any compensation to the seller.
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4. Where to find Lead Options Leads
4.1. You are Lucky!
The reason why we say you are lucky is that when you are
doing lease options, it’s much easier to find leads than if you
were doing BMV deals.
We will go as far as telling you that the leads people throw
away because they do not see any value in them are the best
candidates for lease options.
Remember, investors normally only see one thing in a deal and
that is the price and / or cash flow. Lease options are about
terms.
Here is a question: “Do you think it is easier to convince
someone to sell their property at 30% below the market value
(BMV investing) than allow someone to take over their debts
(lease options investing)?
I think you get our point.
4.2. Lead Conversion
4.2.1. Raw Ingredients
If you want to do lots of property deals, you need to have a
good supply of leads, which are like the raw ingredients for
your recipes for cooking a meal.
No leads, no deals. It is that simple!
If you have good sales, marketing and people skills, you will
get a lot of leads and even for free! We’ll show you what we
mean shortly.
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4.2.2. Probability vs. Skills
Lead conversion is a numbers game. The more you have to
play with, the higher the chance of converting them.
Of course, you’ll need other essential skills, such as lead
selection, due diligence and negotiation. So what you lack in
skills you can make up with numbers.
You can source leads via one or a combination of the following
methods. Which methods you choose are up to you but you
need to know your own strengths and weaknesses.
4.3. Where to Find Leads
4.3.1. Other Investors’ Unwanted Leads
Many investors generate their own leads very successfully
using a whole variety of methods.
This presents an opportunity for you because not all the leads
fall within their buying strategies and so they become the
investors’ excess leads.
Other than throwing them away, many investors would be
keen to pass them to other investors for a finder’s fee if
converted.
Also, you need to market yourself as someone who is unlikely
to waste their leads. So present yourself as an experienced
investor who has good negotiation skills and can complete on
deals quickly.
Of course investors who pass you their leads won’t expect you
to convert every one of them, but you’ll need to give them
regular feedback, at least on a weekly basis.
Otherwise, they won’t do business with you anymore. Just
imagine how annoying it is if someone gives you a lead for free
54
on goodwill and he or she has to keep chasing you for
feedback or doesn’t hear from you again!
In order to find these investors, you’ll need to know where
they gather online and offline. Examples include:
4.3.2. Property Networking Events
See www.BerkshirePropertyMeet.com for the UK’s largest
monthly networking event.
This is one property event that we both attend every
month. If you want to network, then the Berkshire Meet is
a must!
4.3.3. Online Property Forums
Our online forum is located at
www.NetworkPropertyInvestment.co.uk. Here you will
find hundreds of people looking for leads and deals and
are ready to exchange them with you.
4.3.4. Local Investors / Developers
All you need to do is to open the Property Section of your local
newspaper and you’ll find ads headlined “Cash for Your
Properties”, “Facing Repossession”, etc. These companies
generate a large number of leads from motivated sellers who
need to sell their houses quickly.
You’ll find more of these companies’ contact details if you go
to a search engine like Yahoo and Google and type these
keywords.
Contact them and ask if they have any excess leads in
exchange for finder’s fees if the deals convert.
One thing to bear in mind is that these advertisers get
requested for free leads a lot from fellow investors. They may
55
just take your contact details and say they would contact you
but you don’t hear from them anymore.
One piece of advice is to be persistent and contact them on a
weekly basis either via email or phone. This way, you present
yourself as a serious investor and not a time-waster.
4.3.5. Internet Marketing
We’ve already mentioned advertisers on search engines and
undoubtedly, this is one of the most popular and competitive
methods of generating leads.
In order to generate leads online, you need two things:
1. A lead generation website
2. An online marketing campaign
Generally, setting up a website is simple. If you’re not a
graphics designer or web developer, you can pay someone
else to do it for you. Just send us an email and we can refer
some great people to you.
A website could cost from less than a hundred to a few
thousand pounds, depending on its level of sophistication and
functionality.
An important lesson to learn here is that it doesn’t matter how
impressive your website’s graphics are; unless it has the
following two qualities, you will not generate a good quantity
of quality leads.
Superb copy-writing
An effective advertising campaign
Our website Network Property Buyers
www.NetworkPorpertyBuyers.co.uk has generated over
30,000 leads over the past 24 months from sellers who filled in
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a detailed enquiry form because they want to sell their
properties quickly and privately.
Example of lead generation website
(Copyright 2009, Wealth Dragons Limited. All rights reserved)
4.3.6. Online Advertising Campaigns
As far as online advertising is concerned, we will “cut to the
chase”.
Undoubtedly, the world’s largest online Search Engine
currently is Google so we’ll focus on this.
I’m sure most of you have tried searching for information via
Google. When you look for a particular item or piece of
information, you type in the keywords.
If you’re looking for a fast sale of your home, you might use
these keywords:
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Sell house fast
Sell property quick
Fast home sale
And this is what you will see in the search results...
Example of Google Adwords
On the left-hand side, the results are listed according to how
Google views the websites that are relevant to your keywords
and they are ranked accordingly.
If anyone clicks through any of these sites, there is no cost to
the owners of these websites. Therefore, the left hand side of
Google’s search results are called the Natural Listing.
As you can see, thousands of search results appear with these
keywords so getting to the first page of the results takes a lot
of work, time and perseverance.
Website owners use a method called Search Engine
Optimisation (SEO) to influence Google’s ranking decisions. In
general, it takes approximately three to six months of
consistent work to obtain results from any SEO work.
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Further details about SEO can be found at
http://en.wikipedia.org/wiki/Search_Engine_Optimization
The results on the right hand side are based on Google
Adwords or Pay Per Click campaign.
Advertisers are charged each time their ads are clicked by end
users. The cost per click (CPC) depends on how many other
ads are bidding for those keywords.
Generally for each keyword, the higher the position you want
your ad to appear in the search results, the more money you’ll
need to bid. The reason is that more traffic tends to go
through a higher position than a lower one and hence, more
expensive.
However, if the quality of your ad is good because people find
it relevant to what they’re searching for, it will enjoy a higher
click through rate (CTR). If both you and your competitor are
both bidding the same amount of money per click or CPC for a
particular keyword, your ad will enjoy a higher position than
your competitor and your overall cost will be lower.
One way to improve the quality of your ad is through good
copy-writing.
Here are some tips to help you get started:
1. Adword Tool
Use it to identify your competition and demand for your
chosen keywords. The less competitive ones could be very
cheap to bid for.
2. Don’t bid too much
If the cost price of your product is £5, it doesn’t make sense
that you’re spending £6 to achieve a sale.
You’ll need to work out how much you’re spending on your
campaign in relation to your sales and profit.
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3. Avoid the top three positions
Unless you’re a multi-national company with unlimited budget
trying to create brand awareness, the top three positions will
get you lots of traffic but of low quality and your budget will
be used up in no time!
People often mistake the ads in the top three as links from the
natural listing as they do appear on the “left hand side” or the
result page.
Find an optimal position that generates a profit for your
campaign.
4. Relevancy
The biggest mistake that people make is that they create their
Google ads that are irrelevant to their chosen keywords.
For example, if your keywords are “Sell your House Fast” and
your Google ad says “Sale and Rent Back”, there is little
relevancy in the eyes of Google, although the latter may be
part of your service.
What is worse is that when people click through your Google
ad, they are taken to your website that is irrelevant to what
they are looking for.
Google rewards relevancy and penalises irrelevancy. The way
they do it is to make you pay more for the same keywords that
you are bidding for a particular position.
For example, if you and someone else are both bidding “sell
house fast” for position 4 and Google perceives your ad to be
less relevant to the keywords, you would have to pay more.
Unfortunately, most people do not set up their Google
campaigns properly and end up spending their budgets quickly
without generating good results.
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The truth is that if Google Adwords are done properly, it is one
of the most powerful advertising media in the world.
If you want some FREE tips about generating leads while you
sleep using Google Adwords, visit our website at
http://www.wealthdragons.co.uk/leadgeneration.htm.
4.3.7. Leafleting
You can create highly targeted results through leafleting that
can’t be achieved via the internet.
The key to success in good leafleting is, you guessed it, good
copy-writing skills as discussed.
The main disadvantage is that if your message is ineffective,
you will have to wait until your next batch of leaflets before
any changes can be made.
Therefore, to be effective in leafleting and any advertising
campaigns, you need to split test your ad and measure your
results.
In any given campaign, you should have at least two versions
of advertisement with only one thing different between them.
For example, in a particular campaign you could have two
identical ads but different headlines.
You also need to tag each ad with a reference. Otherwise, you
can’t measure your results. That’s the reason why many ads
ask you to call a number and quote a reference.
After a period of time, you’ll know exactly which of your two
versions have produced better results. You then simply delete
the worse performing version and create a new version to try
to beat the one you’ve kept.
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4.3.8. Newspaper Classified Ads
If you want to target specific areas, local newspaper ads are
your best options.
Most local papers have a weekly property section catered for
estate agents, landlords and associated property services.
The price for these ads depend on their sizes and where
they’re positioned in the paper. Generally, if you advertise
with them over a longer period, you can negotiate a larger
discount.
The excellent news is that if you’re advertising for sellers who
are fed up with paying their mortgages and wish to move on
immediately, your ad might be the only one!
With classified ads, the number of words you can put in are
very limited so use them very sensibly. Sometimes less is
more.
Example of newspaper ad
(Copyright 2009 Wealth Dragons Ltd. All rights reserved)
Use your creativity but don’t forget to follow the AIDA rule.
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4.3.9. Solicitors, Brokers & Agents
These professionals deal with desperate sellers all the time.
Some of these sellers have had their sales fallen through in the
last minute and many are facing repossession, especially in the
recent climate. If their properties don’t have enough equity for
a cash sale, they become perfect candidates for lease options
deals.
Why not approach some solicitors, estate agents and
mortgage brokers and offer to take these cases off their
hands?
Some are just happy to get them off their books because they
can’t be helped further. Some might ask for a small fee per
lead or a finder’s fee on completion.
You could also offer to refer a lot of your own clients / friends
/ investors to theses solicitors as a reciprocal business
proposal.
4.3.10. Debt Management Agencies
Debt Management companies have clients who have informal
repayment agreements with their creditors.
Unlike people who are on IVAs or have declared bankruptcy,
those on debt management plans still have control over their
assets and properties. However, their aim is to keep their
monthly out-goings as low as possible so they can service their
debts.
If they fall behind with their repayments, they may face IVA or
bankruptcy.
Under these circumstances, their assets have probably
become their liabilities if they have a cash flow problem.
Therefore, it’s in their best interest to let someone else pay
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their mortgages while they look for cheaper accommodation
elsewhere.
If you happen to generate leads, there may be sellers who
might benefit from a debt management plan than to sell their
properties. In which case, you may propose a business
arrangement with some of these debt management
companies to exchange leads.
4.3.11. Buying Leads from Lead Sellers
The quickest way to gain access to motivated seller directly is
to buy leads from investors or companies who generate them.
As soon as you pay for a lead, it will be sent to you via email so
there’s no waiting around.
Also, a reputable lead seller will qualify a lead by asking a list
of questions that allow you to assess the level of motivation
from the seller.
Example of Lease Options Lead #1
(Copyright 2009 Wealth Dragons Ltd. All rights reserved)
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The good news is that the best candidates for lease option are
the leads where the sellers do not wish to consider a large
discount or are unable to do so due to insufficient equity.
These leads are normally very cheap to buy from the known
lead providers, including us.
However, if you are worried about spending money on leads,
then this game is not for you. It is strictly a numbers game.
The more numbers you have to play with, the more chance
you have in converting a lead into a deal.
You’ll need to consider how much finder’s fee you have to pay
for a deal found for you (typically between 1 – 3%) or
advertising online or offline to generate your own leads.
We’ve had many success stories of people spending less than
£50 on leads and managed to turn them into deals worth tens
of thousands of pounds. That’s the reward for being good at
this game.
We’ve also come across many people who’ve spent hundreds
of pounds to generate leads for themselves and got absolutely
none whatsoever!
If you decide to buy leads, our advice is that you compare both
the price and quality of leads amongst different lead
providers.
Contrary to what many investors believe, leads are not just
simply divided into qualified and unqualified leads. There’s no
such thing as a totally qualified lead.
What’s important is that you understand the definition of a
lead provider’s qualification and their qualification process.
Generally, the more information and higher degree of
qualification, the more you’ll expect to pay for a lead.
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66
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Example of Lease Options Lead #2
(Copyright 2009 Wealth Dragons Ltd. All rights reserved)
The above shows the profile from one of our typical leads on
our website. As you can see, there is a lot of information
disclosed by the seller.
The strict qualification process and a meagre £25 cost make
our leads the highest quality and best value for money in the
property business.
Visit www.NetworkPropertyInvestment.co.uk.
And even better news is that you can get someone who has
converted hundreds of leads into good profitable deals to
convert the leads for you.
Visit www.DealCloser.co.uk for further details.
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One investor bought her FIRST lead from Network Property
Investment and paid £125 (priced for 30% BMV lead) for it.
Since she didn’t feel fully confident with her negotiation skills,
she decided to use Deal Closer to do the negotiation on her
behalf. For £95, Deal Closer converted her lead!
This was a one-bedroom flat in Hackney achieving £256
positive cash flow and she didn’t even need a mortgage!
If you want to see her testimonial amongst all the other ones we
receive daily from our happy investors, visit our website at
www.WealthDragons.co.uk.
4.4. Copywriting
Research shows that an average person would leave a website
within 10 seconds if they don’t think they’ve found what
they’re looking for.
Therefore, superb copy-writing is paramount if you want the
enquirer to stay on your website, fill in a form and submit it
with his or her personal details.
One way to start is to imagine yourself as the end user. Think
carefully what you would like to see if you were looking for
information about selling your house fast.
In copy-writing for all marketing media (website, TV, radio,
newspaper, etc), one model you can use is called AIDA.
4.4.1. A = Attention
This is your headline that “grabs” the attention of your
audience. It must be striking, relevant and effective enough to
make your audience want to find out more.
Here are some of the good headlines:
“Are You Tired of Paying Your Mortgage?”
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“Rent Now, Buy Later!”
“Who Says You Need Mortgages to Buy Houses?”
“If you can fix my house you can have it”
4.4.2. I = Interest
Once your audience has stayed on to find out more, you need
to keep them interested. But make sure your message is
“user” rather than “you” orientated.
What we mean is that a lot of copy-writing is about “what I
can do or offer as a product or service”. It’s all me, me, me and
it’s a mistake!
It should really be about your audience. You need to focus on
their problems and how their lives are being affected. It should
be about them, them, and them.
Another key point to remember is that when you describe
your product, the emphasis should be on the end results
rather than your product features.
Do you think people go to a DIY store to buy a drill for the
drill?
No, they buy a drill for the “hole”. This is how you can keep
your audience’s interest.
4.4.3. D = Desire
Create a huge desire for people to buy your products.
At this point you need to think what would sway their decision
to come with you rather than your competitors.
Here is a very effective technique called pain and pleasure, as
people are generally motivated by these two things.
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What you could do is to build the desire for your products or
services because they can avoid pain or create pleasure.
4.4.4. A = Action
I’m still flabbergasted by many ads that have been carefully
constructed but there is “no call to action”!
Have you ever come across websites or ads that don’t make it
very obvious what you have to do in order to make your
purchases or find out more information?
Calling or prompting a potential customer to action is what
separates a sale from no-sale or a lead from no-lead!
If you wanted to know more about AIDA in a lot more detail
and have real-life examples where you could listen to real calls
where it’s been applied, we have a pack that we have
developed over the last 3 and half years called the
“Negotiators Survival Kit”.
This is a study of advanced techniques, which has been
developed after speaking with over 3,000 motivated sellers. It
teaches you how to overcome any objection and close any
deal based on people’s buying patterns, as people generally
buy for emotional reasons. For further details, visit our
website at www.WealthDragons.co.uk.
Exercise 8
Please answer the following questions:
1. There are at least 11 ways in which you can obtain leads from
motivated sellers. Name five of them:
#1
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#2
#3
#4
#5
2. When you receive a free lead from someone, what is the most
important thing you must do to instil confidence in this person to
give you further leads in the future?
3. The AIDA model is a model used by copy-writer in all kinds of
media. Explain what each letter means:
A =
I =
D =
A =
Answers on page 102
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4.5. Critical Success Factors
At this point, it is crucial to understand what factors contribute
to a successful lease options deal.
Video Four http://www.wealthdragons.co.uk/homestudyvideo4.html
Exercise 9
After watching the video, explain briefly what the THREE
critical success factors for a lease option deal are:
#1
#2
#3
Answers on page 102
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5. Selling the Idea of Lease Options to
Sellers
5.1. Negotiation
This is what it all boils down to – negotiation. There’s a saying
that a lead is only as good as the person negotiating it.
However, the way you approach a seller with lease options is
different from trying to get a big discount in a typical BMV
deal.
The good news is that it is easier to persuade a seller to give
up their debts than their equity. The key is that you need to
communicate the benefits and explain lease options in the
simplest terms.
Most sellers have never heard of lease options. If you confuse
them, you will lose them!
Most people only know one way of selling a property and that
is through an estate agent. Anything perceived as more
complicated could put the seller off.
Therefore, never use jargons or even mention the term “lease
options” unless it is necessary. Remember, you are selling a
“hole” and not a “drill”.
Practice explaining to someone who knows nothing at all
about the subject and keep it simple.
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5.2. Negotiation vs. Consultation
The way communicating lease options is different is that in a
normal BMV deal, you are trying to get 25 – 30% discount
from a seller. The way you justify that is to position yourself as
a Cash Buyer who can complete your deal quickly.
But a cash buyer has only one way to do a deal. That is to get
as much discount from a seller as possible and so they
negotiate to win the deal.
You may think that negotiation is about win – win but in a
typical BMV deal with a discount of 25 to 30%, is it really a win
– win between the buyer and the seller?
We will let you make up your mind on that but our feeling is
that if a seller was given a choice, relinquishing 30% equity of
their home to “get out of a situation” would not be their most
obvious choice.
Due to the flexible nature of lease options, you are able to
help a seller in all kinds of situations even if the seller has little
or no equity in the property.
Therefore, you need to position yourself as a resourceful
professional who can help a seller in more than one way. So
you become more of a property consultant and the seller,
your client.
The difference between a customer and a client is that with
the latter, you have the person’s interest at heart.
5.3. Where Do I Begin?
Negotiation is a very vast topic that is a separate course alone.
The best way to begin is to learn the process that we use to
negotiate property deals and we teach our students the same
on our Apprentice Day.
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This begins with an assessment.
5.3.1. Which Stage am I at?
Everyone has different experience in talking with sellers or
negotiating over the phone. Broadly speaking, we can put each
person in one of three categories and of course, there would
be overlaps.
Video 5 Wealth Dragons Deal Closer Quadrant
See this video now
http://www.wealthdragons.co.uk/homestudyvideo5.html
Exercise 10
After seeing the video, where do you think do the majority of your skills
fit within the quadrant? Just mark on the quadrant and do not forget you
could be between two quadrants and some of your attributes.
The Opener
The Consultant
The Ultimate Deal Closer
The Closer
Once you have identified your skills level, your goal is to move
towards The Ultimate Deal Closer.
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Video 6 Wealth Dragons Motivation Triangle
Take a look at this video to identify the process of calling a
seller.
http://www.wealthdragons.co.uk/homestudyvideo6.html
Exercise 11
Based on the video on Motivation Triangle you have seen, put the
following parts of the process in the correct order:
1. Introduce yourself
2. Uncover information
3. Explain the purpose of the call
4. Ask for permission
In the Motivation Triangle, what are the three areas that you need to
uncover from the seller before you can structure your deal?
#1
#2
#3
Answers on page 102
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Audio 2 (How to Negotiate a Lease Options
Deal)
Go to
http://wealthdragons.s3.amazonaws.com/continuity/pmm/loaudio.mp
3 and listen to a recording of a real call made by John to a seller.
The property is 3-bedroom semi-detached property in Wigan,
Lancashire. The seller was in negative equity and the seller was
experiencing financial difficulties. The deal was eventually closed
and completed.
As you can see, the best approach is to make the idea of lease
options as simple as possible so that the seller can see the benefits
of it.
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6. Lease Options Strategies
6.1. Your Objectives
Do you remember an option has intrinsic, time and Net
Present value?
When you do a deal, you should focus on
1. Creating instant intrinsic value by agreeing a deal at
below market value
2. Creating time value by lengthening the option period
3. Paying as little an option premium as possible –
preferably £1
4. Maximising cash flow once the deal is done
5. Considering exit strategies for your deal
6.2. Deal Structuring
Before you structure a lease option deal, the most important
thing is to talk to the sellers and understand their situations.
Listening skills are paramount when it comes to negotiating
with sellers. We will discuss in detail how negotiation should
be done in lease options.
6.3. Seller’s Situations
These may be broadly categorised below and deals can be
structured accordingly:
1. Equity available
2. No or negative equity
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3. Part cash part option
4. Part now part later
5. No mortgage
6.3.1. Strategy One – Equity Available
Deal structuring: Equity Available
6.3.1.1. Features
Typically properties with equity
Suitable for sellers with insufficient equity for a BMV
deal or unwilling to consider a large discount for one
The option price could be anywhere between seller’s
mortgage and market value – a win / win situation
0
20000
40000
60000
80000
100000
120000
140000
160000
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
Seller's Mortgage Market Price Option Price
Intrinsic Value
Seller’s Profit
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The seller only gets a profit only when the buyer
exercises the option. Otherwise, the seller won’t get
anything today unless sold in the open market.
6.3.1.2. How to Approach Seller
“If you sell your property today through an estate agent, you’ll
need to reduce the price once or several times to attract
interest. With the little equity you have, you’ll get nothing at
all if your property gets sold. However, if you allow us to take
over your property and mortgage with a lease option, you can
move on quickly. If and when we exercise our option to buy
your property in the future, you would get a lump sum of cash
that you wouldn’t get if you chose to sell in the open market
today!
If we choose not to buy it in 5 years time, we’ll just hand the
property back to you. By then, you would have benefitted
from 5 years of not paying the mortgage. How much do you
think your property would be worth in 5 years time?”
6.3.1.3. Example
This was a deal in Ilford, Essex where the seller needed to sell
because he had bought another house. Due to the property
market downturn, he could not sell his existing one and having
to pay the mortgage on both properties was becoming a huge
burden on his finances.
There was equity in the property but he was not prepared to
sell at a substantial BMV and “walk away with nothing”.
He wasn’t interested in being a Landlord neither because he
viewed the management hassles and vacant periods as
substantial risks.
Here are the figures:
Valuation £200,000
Mortgage Outstanding = £155,000
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Mortgage = £745 PCM
Market rental = £950 PCM
The offer of £175,000 was accepted with a 7-year option
The seller could make £20,000 within 7 years if the option is
exercised
Cash flow to us = £205 a month after all costs
6.3.2. Strategy Two – Little, No or Negative Equity
Deal structuring: No equity
0
20000
40000
60000
80000
100000
120000
140000
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
Seller's Mortgage Market Price Option Price
Intrinsic Value
Option Price = Seller’s Mortgage
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Deal structuring: Negative equity
6.3.2.1. Features
There is no or negative equity in the property
The option price must be set equity to the seller’s
outstanding mortgage
If the property is in negative equity, only consider if
there is prospect of exceptional growth.
The seller just “washes their hands off” the property
The seller may need to contribute towards the monthly
mortgage in some cases
Should try to increase the time value to compensate
for the lack of intrinsic value
6.3.2.2. How to Approach Seller
“Your property is now a liability to you because you can’t sell it
in the current market. It has no/ negative equity in it. The
longer you keep it, the more it will drain your cash flow. The
0
20000
40000
60000
80000
100000
120000
140000
160000
180000
200000
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
Seller's Mortgage Market Price Option Price
Intrinsic Value
Option Price = Seller’s Mortgage
Negative Equity
83
only way you can move on quickly is to allow us to take over
your property completely including your mortgage. We might
choose to buy it within the next 10 years.
The only problem is that the rent we get for this property
doesn’t quite cover your mortgage. There is a shortfall of £200
per month and that means it won’t work for us. Therefore, in
order for this to work, you’ll need to contribute this shortfall. It
means your present outgoings including your mortgage (plus
secured loan) will drop from £1,000 to £200. What difference
would that make to your life or situation?”
6.3.2.3. Example
We closed a deal in Newarthill, Motherwell. It was a three bed
end-terraced house in excellent condition. The seller was
going through a divorce and just wanted to get rid of the
house.
Here are the figures:
Market value £75,000
Outstanding mortgage = £58,000
Secured loan = £17,000
The offer of £75,000 was accepted with a 10-year option
Monthly mortgage payment = £256.38 (5.3% variable)
Monthly secured loan repayment = £280
Rental = £550
Seller contributes £100
Cash flow to us = £114 per month
The seller didn’t mind contributing £100 because otherwise,
her monthly out-going mortgage and loan repayments would
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total £536.38. Her ex-husband had run away so this would
have been a hefty amount for a single mother with two
children.
Although in theory the seller will get nothing out of this deal in
the future, is there any reason why you can’t give a small
percentage of your future profit to reward the seller’s
contributions and not defaulting over the years?
Of course not!
This is the beauty of using lease options – you may structure a
deal in so many ways to help a seller’s situations.
6.3.3. Strategy Three – Part Cash Part Option
6.3.3.1. Features
This is the strategy if upfront cash is needed
Examples include arrears and seller needing cash to
move on
Any cash you pay upfront is the option premium
Should try to compensate by adding the intrinsic value
and time value to the option
Any cash paid should be compared to similar returns
on investment, i.e. what returns will I get if I put this
money in another investment vehicle?
6.3.3.2. Example
We completed on a three bed end-terraced house in
Stapleford, Nottingham. The property was in good condition
but the seller was in arrears.
Here are the figures:
Market Value = £100,000
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Mortgage outstanding = £90,000
Arrears = £2,000
Rental income = £150 per month after all costs
Therefore, we agreed the option price at £90,000 and option
period of 10 years. We paid the seller’s arrears of £2,000
which we viewed as our cash investment based on the
following analysis:
AFTER 10 YEARS (assuming no inflation):
We viewed the capital growth viewed as a bonus.
Rental return = £18,000
= 800% return on the initial £2,000
This is a phenomenal return compared to any known
investment vehicles. If your seller requires cash up front and
you don’t have this money, do you think your other investors
might be interested in doing a joint venture with you?
6.3.4. Part Now Part Later
Video 7 Part Now Part Later
Watch the video below by following this link:
http://www.wealthdragons.co.uk/homestudyvideo7.html
This is one strategy that uses a mix of cash and option that would
allow you to do many deals. Here, you will find a practical
application for a “put” option.
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7. Advanced Options Strategies
Based on everything you have learnt, you should be able to find and
structure deals in more ways than someone who only knows how to
do BMV deals. There is no fixed way to do lease options so it is only
limited to your imagination.
We have listed 11 advanced strategies that we use regularly. Some
involve maximising short-term cash flow while others, exit routes.
7.1. Identifying Option Opportunities
These are the topics that we have covered extensively. In
retrospect, how many leads have you thrown away in the past
because you didn’t think they were viable?
From now on, try to maximise the potential of each lead even
when a property has negative equity in it. Analyse each seller’s
situation and apply the lease option strategies you have learnt
from this course.
Here is an example of how powerful even a simple Purchase
Option could be:
A student of ours named Chris used to work for a property
company that sourced properties and land. He was
responsible for a deal where he put an option to acquire a
piece of land that was barren and paid £5,000 as an option
fee. The company then applied for planning permission which
was subsequently granted. The option was then sold to a
developer for a hefty £8 million.
After two years, the developer completed on the development
worth a total of £33 million!
So don’t discard any more leads until you have exhausted all
your options. Think creatively and think “outside the box”.
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7.2. Reverse BMV Purchase
When you have enough intrinsic value in your option, you may
simply exercise your option and buy it with a mortgage at
below market value.
This is how the figures work:
Let’s say a seller contacts you and the house is worth £100,000
and the mortgage owed is £100,000. You say to the seller that
you want to buy it in 4 years time for £100,000.
The seller agrees and grants you a purchase option for what he
owes on the house. In the meantime you take care of their
mortgage payments.
In 4 years time - if the market value increases from £100,000
to £150,000 and if investors can borrow 75% loan to value,
you can then borrow £112,500.
At this point you exercise your option and pay off the
£100,000 that the seller owes and pocket the difference as
your tax-free cash back. In this case, it’s £12,500.
7.3. Jim’ll Fix It
If you’re as old as us then you’ll have very fond (or not so
fond) memories of the legendary TV show since the ‘70s from
the BBC called “Jim‘ll Fix It”.
In this show, children would write to the host Jimmy Savile
with their wishes and Jim would make their “dreams” come
true. The letters were always read out in the show with the
catchy “Dear Jim” or “Dear Jim’ll” because some children
thought that was Jimmy Savile’s first name!
We use Jim as a metaphor because if you have acquired a
property with a lease option but the property needs a lot of
work before it can be let, say £10k worth of it, then what
would you ask Jim?
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This is what we propose:
“Dear Jim,
We have a property that needs a lot of work done to it before
we can let or sell it. Could you please fix it for us at your
expense and in return, we will give you a percentage of the
rental profit and a percentage of the proceeds when it gets
sold in the future?
Yours sincerely,
Vincent and John”
What do you think Jim would say?
Well, we can tell you that Jim has said “yes” many times to us
and got us out of some “sticky” situations!
The reality is that there are many builders who are looking for
work during the present economic downturn. Many of them,
especially the ones from Eastern Europe, would not have the
opportunity to invest in property because they are not eligible
for a mortgage or they simply don’t have a deposit.
So if you present a proposal such as the one above to a
motivated builder, what do you think he would say?
Besides, if you have been quoted that the work would cost
£15k in total, then how much do you think it would cost a
builder to get their materials through their trade excluding
labour cost?
It would be a fraction of that.
So remember Jim’ll Fix It when you see a property that needs
substantial work.
The following is an example of a property we bought in
Tyldesly, Manchester – one we wish we had never bought!
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Property valuation = £80,000
Work quoted to us = £10,000 but builder agreed to carry out
work for undisclosed sum covered by them.
Valuation after work = £100,000
Option granted to builder to buy at £90,000
Our paper profit = £10,000
Builder’s intrinsic value in option = £10,000
Until the builder exercises his option, any rental profit is
shared on a 50:50 basis.
7.4. First Time Buyers
This is a strategy that allows you to sell a property at full
market value under any given market conditions.
The reasons why first time buyers don’t buy properties are:
1. They can’t get a mortgage
2. They can get a mortgage but they don’t have a deposit
Therefore, the best candidates for this type of deals are the
first-time buyers. We have millions of them in the UK.
The principle behind this is very simple.
If a buyer can’t get a mortgage and doesn’t have a deposit,
you simply “wrap” them in your mortgage or the mortgage of
the owner of the property who has granted you an option. In
other words, you do a Rent to Own or Sandwich Option. You
can use the rent premium to build up a deposit on behalf of
your tenant buyer until one day they can get a mortgage.
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What if a buyer can get a mortgage but doesn’t have a
deposit?
You give or “gift” them a deposit.
Here is an example of how it works:
If you have an option to buy a property at £80,000 and the
property is worth £100,000, you have £20,000 of intrinsic
value in this option.
So now you exercise your option to buy it at £80,000. At the
same time, you sell it at the full market value, which is
£100,000 to a first-time buyer. The buyer can get a 90% loan-
to-value (LTV) mortgage and needs £10,000 deposit.
From the deal, you make £20,000 profit so out of which, you
can “gift” £10,000 to your buyer as a deposit.
Your net profit will become £10,000 and your first-time buyer
gets his property using none of his own money – a win / win
situation.
7.5. Homes under the Hammer Buyers
Another popular TV series from the BBC since 2003, Homes
under the Hammer epitomises the property boom in the UK.
The show features property investors who buy from auctions.
Like Jim’ll Fix It, these people tend to refurbish these
properties before selling them at a profit or letting them out.
Most people who attend auctions are amateurs who tend to
overbid their lots. They go to auctions because they don’t
know how to find BMV leads, negotiate directly with
motivated sellers or do lease options.
If you wish to sell a property but the market is not favourable,
you can sell it to such a motivated buyer who is looking for
deals. This could be a deal you’ve negotiated at a large
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discount from a seller or an existing option deal where its
intrinsic value has grown over time.
As long as the discount you negotiated or intrinsic value
accumulated exceeds the price a motivated buyer is willing to
pay for it, you can dispose of your property and make a profit.
7.6. Tenant Buyers
We have so far discussed the subject of tenant buyers
throughout the course. Just a recap - tenant buyers are those
who are granted a purchase option by their Landlords while
they are renting their properties.
So if you’re the optioner and you already control the property
via an option, granting a purchase option to a third party will
make it a ” sandwich” deal.
But of course, you could already be the owner of a property
and you can still grant an option to your tenant.
Granting options to tenants provide incentives for people to
rent your property, even if there are problems with it. Let us
give you an example:
One of our properties was turned into a cannabis factory by
the tenant. The damage caused was a colossal £20,000!
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The property was left in such a state that no letting agents
would even take it on. The mould was growing extensively on
the outside wall due to lack of ventilation and it took 5 hours
and 3 skips just to clear the plant pots away!
Of course, we could have found Jim’ll Fix It to sort out the
property, but instead, we simply put up a clear sign outside
with “Rent Now, Buy Later. No Mortgage Required”.
Guess how many calls we received on the first day?
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48 to be precise!
The property was eventually let with a Purchase Option to a
DIY enthusiast who happened to be a first-time buyer. He was
happy to have a house he could call home and it was his first
step on the property ladder.
You see, granting an option to your tenant does not always
have to involve pocketing an option fee or premium but some
kind of benefits such as fixing up the property.
The power of combining different strategies is what you
should aim to achieve in difficult situations or problem
properties, as we demonstrated with this “cannabis factory”.
7.7. Standard Buy to Let
If an option deal is generating good rental profits from a
standard buy-to-let tenant and its intrinsic value is growing at
a good rate, why grant a sandwich option to a third party and
limit your potential profit?
If you do decide to grant an option to your tenant, you may do
so at anytime. You can wait until the middle or towards the
end of your option period when you’ve seen the growth of
your asset price before planning your exit strategy.
Remember options are just different ways for you to structure
deals so you may offer multiple solutions to sellers.
Some people are mistaken that they have to do lease options
with sandwich lease options and this is not the case at all.
If you can rent out a property to a normal tenant and still
achieve positive cash flow, then you can just keep it that way
without further complications.
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7.8. Flip the Option to Investor
There are property deals that are sourced, negotiated,
managed by deal providers. They are known as Packaged
Deals or Ready-Made Deals.
As you have already learned, an option is a tradable
commodity. Once you have agreed on an option deal, you may
assign the contract to another investor.
When you pass a deal, to which you have a right, to another
investor for a fee, this is known as flipping.
The difference between flipping an option deal and an
ordinary packaged deal is that you need to educate your
investors about lease option.
Many investors still possess a “dinosaur” mindset.
It is still a relatively new method of buying properties in the UK
so you’ll need to explain all the benefits, such as no mortgage,
valuation and building instant cash flow.
And that is why you are studying this course in the first place!
So how much can you flip an option deal for?
Well it depends on the intrinsic and time value of your option
and the cash flow it generates, as discussed.
It also depends on external factors such as a property’s
location and “lettability” and the state of the property market.
If you have a 5-year option with an intrinsic value of £30,000
and net cash flow of £10,000 over the five years, in theory
your option is worth £40,000 without taking into account its
time value.
Would you sell it for £2,000, £5000 or even £10,000? You’ll
need to know the supply and demand of your market.
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One way of doing it is to test it.
In the above example, if the market is buoyant, an investor
could buy your option for £10,000, exercise it and then sell it
to realise its £30,000 intrinsic value to make a tidy £20,000
profit!
Let’s say if this deal has no intrinsic value today but generates
£200 a month profit from the rental, a 5-year option will give a
total profit of £12,000. If you sell this deal for a modest
£2,000, the investor could make 500% return on investment
over 5 years, or 100% per year!
That is a return not to be baulked at and it hasn’t even taken
into account the capital growth.
How much would you generate if you kept the £2,000 in a
bank to earn interest?
I think you get the point now.
Like converting leads, flipping deals is also a numbers game.
The more contacts you have in this business, the more
opportunities you have to flip your deals and make handsome
profits.
We’ve already discussed the importance of networking in the
property business.
So why not start building a client list, package up Ready Made
lease option deals and flip them as part of your wealth
strategy?
To learn more about packaging Ready Made Deals and make
£5k to £10k a month, visit
www.NetworkPropertyInvestment.co.uk
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7.9. HMOs
Earlier we mentioned HMOs or Houses of Multiple
Occupancies. Turning properties into HMOs is a great way of
maximising cash flow for your deal.
If you control a property with limited rental, you may convert
into single bedsits and let them individually. A living room
could be turned into an extra bedroom.
There are regulations concerning HMOs and the subject is not
within the scope of this course. You may obtain good
information on HMOs by visiting...
In some cases, you would need to apply for a license to
operate as illustrated by the diagram below but please do
consult with your local council about their licensing
restrictions.
The point is when you have control over a property with a
lease option, you have the right to do work to it, change the
layout and convert it into a “cash cow” such as an HMO if the
property presents such a potential.
Here’s an example:
We have a lease option on a 3-bed semi-detached property in
Leicester. The seller’s mortgage with secured loan required a
monthly payment of £600. Since the market rent was only
£550 pcm, we decided to convert the property into an HMO
with 4 lettable rooms.
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The property was close to the University of Leicester so we
decided to target the student market. Here is the break-down
of the rental we achieved:
Room 1 £80 / week
Room 2 £70 / week
Room 2 £60 / week
Room 4 £55 / week
Total £265 / week or £1,148 PCM
Cash flow £548
If you want to learn the “ins and outs” of investing in HMO
properties, our good friends Jim Haliburton (aka HMO Daddy)
and Bobby Gill are experts in this field. Visit
http://www.hmo.networkbillionaire.com for more
information.
7.10. Struggling Landlords
How many landlords do you think are struggling financially at
the moment?
Repossession has been rising exponentially since the credit
crunch and many repossessed properties are from buy-to-let
investors who have over-exposed themselves and fallen into
arrears.
Some landlords just simply can’t find tenants because of the
over-supply in the rental sector.
Now you have the knowledge and tools to solve property
problems. Why not “joint venture” with these struggling
landlords?
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You could suggest finding tenants or tenant buyers for them
for a fee or a percentage of the profit, just like you would joint
venture with Jim’ll Fix It if you had a problem property
yourself.
Maybe the property is too big or too expensive for a single
family in a market where the demand is more from Housing
Benefit tenants or people looking for bedsits. In which case,
you could suggest turning the property into an HMO or House
of Multiple Occupation.
With property options, there are so many ways in which you
can remedy difficult situations.
You just have to think creatively.
7.11. Buy to Sell
Similar to Reverse BMV Purchases, instead of buying your
property BMV and keeping it, you find a buyer to buy it and
you simultaneously exercise your option with your seller.
Obviously this strategy works well when the property market
favours buy-to-sell.
Traditionally, many developers would use a bridging loan to
buy a property at an auction, do work to it, put a mortgage on
it and then sell at a profit.
Why not simply find a motivated seller, put a purchase option
on it, do the work and then sell?
This bypasses all the hassle for the above and will save you
thousands of pounds for all the fees and interest.
To minimise your risk when you sell, make sure you have seen
the mortgage offer from your buyer and even taken a deposit
(preferably 10%) before exercising your option.
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“A journey of a thousand miles begins
with a single step.“ Confucius
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Answers for Exercises
Exercise 1
In no particular order:
1. No mortgage
2. No valuation
3. Flexibility with terms
4. More leads / higher conversion
5. Fast completion
6. Reduced risk – option not obligation
7. Seller can sell when there is little or no equity
Exercise 2a
1. Intrinsic value
2. Time value
3. Net present value (NPV)
Exercise 2b
1. Market value and outstanding mortgage
2. Market value and option price
3. Cash flow and option period
Exercise 3a
1. It’s a written contract
2. From optioner or granter or underwriter to optionee or grantee
3. The right
4. The obligation
5. Buy or sell an asset
6. Price
7. Anytime during a specific period or at a future date
Exercise 3b
1. Delete “the obligation”
2. Delete “the right”
Exercise 4
1. Management agreement
2. The seller and tenant
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3. The investor
4. The investor directly to the mortgage lender
5. The investor
6. The investor
7. Delete “True”
Exercise 5
1. In no particular order:
Prepare contract documents
Legal searches
Incorporate clauses
Advise on deal structuring
Register document in Land Registry
2. To exercise the option and complete in the seller’s absence
3. Delete “Y”
4. “Would you use an divorce lawyer if you’re making a
compensation injury claim?”
Exercise 6
1. F
2. F (It’s called Consent to let)
3. T
4. F
5. T
6. F
7. F (but it also depends on the seller’s capability)
8. T
Exercise 7
1. See below:
Upfront option fee
Rent premium
Skills contribution
2. Deposit is saved up by the investor
3. Delete “F”
4. See below:
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See mortgage offer and take deposit
Not granting a call option in a slow market
Exercise 8
1. In no particular order:
Networking events
Local investors
Solicitors
Estate agents
Mortgage brokers
Debt management companies
Newspaper ads
Leaflets
The internet
Buying leads from lead sellers
Online forums
2. To give feedback
3. See below:
A = Attention
I = Interest
D = Desire
A = Call to action
Exercise 9
1. Leads
2. Communication with sellers
3. Managing relationship with sellers
Exercise 11
Correct order:
1. Introduce yourself
2. Explain the purpose of the call
3. Ask for permission
4. Uncover information
Three things to uncover:
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1. Motivation
2. Time
3. Capacity
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