- An Investor and a Vendor (property owner) enter into what is known as an Option Agreement. The Option Agreement gives the Investor the opportunity to purchase the property at a mutually agree price within an agreed time-scale sometime in the future. Normally the price for an Option Agreement is £1, plus legal fees often paid for by the investor.
- Once the Option Agreement has been legalised the Vendor then moves out of their property. It is then the Investors responsibility to ensure that the mortgage payments and other household ralated bills continue to be paid.
- The Investor then finds a tenant who is willing to rent the property and then purchase the same property at a later date, at an agreed price. The tenant will be paying a premium for the rent of the property so as to purchase the property at a later date via the Option Agreement.
There are a number of variations of the above.
I recently came across someone (PS) who had signed up to the lease option agreement. Their problem was that they were finding it increasingly difficult to make the monthly mortgage payments. This was also causing them to get deeper into debt with unsecured loans and credit cards.
PS was approached by an investor who through an option agreement would take over the property and thereby allowing PS to move into a rented property, where the monthly rental was less than the mortgage payment. This seemed to be a great solution for PS, knowing that the property would be sold at a future date and not having to worry about the monthly mortgage payments. So the Option Agreement was finalised.
PS also had some financial issues, so she also entered into a debt management plan (DMP). It was whilst she was in the DMP, PS became concerned that an unsecured loan with Northern Rock or NRAM was not in the DMP.
This was investigated further by the Debt Management Company (DMC). It turned out that the unsecured loan was linked to her mortgage. Further investigation showed that the mortgage for her property was not being paid and had not been paid for many months!
So the Investor with whom PS had taken out the Lease Option Agreement with, was not paying the monthly mortgage payments. Not only that, the property itself did have tenants in, so it looks as though the Investor was pocketing all of the money that the tenant was paying in rent.
As it stands at the moment PS is even deeper in debt, with the mortgage company now threatening to repossess the property!
Lease Options are fairly new to the UK, so if you are going to enter into such an agreement, make sure you have a fully qualified lawyer to advise you!
Here is the letter from NRAM:
“NRAM Debt Management
Telephone 0845 603 5409
Facsimile 0191 522 3839
Thank you for your letter dated 8 June 2012 regarding the above mortgage account.
I confirm that the enclosed authority has been noted on our records, thereby enabling us to discuss the situation pertaining to the above.
As requested, I confirm the following information
- Current Balance: £191,614.51 (please note this is not a redemption figure)
- current careers: £4550.22
if you have any further queries please contact the office on the above telephone number.”