Lease Option, No Option

This week sees another lease option deal in court and this was supposedly carried out by experienced people who knew what they were doing. The story, somewhat simplified, goes like this; house owner sees advert for long term rent opportunity for her home which is becoming vacant as she is moving in with a new man. She agrees five year deal to remove the hassle from renting and the new leaseholder looks to rent out the house to five individuals for twice the amount of rent he pays her every month. He’s been advised to expand his property income by moving away from buying one a year, to taking options or rent deals for cash flow.He’s also responsible for all the maintenance, the management of the tenants and the all the bills as a shared house can never agree on who owes what.

He looks to find LHA (Local Housing Authority) tenants and within two months has three of the five places filled. It takes another two months to fill the other two rooms by which time he is already down a tidy sum as the rent to the owner, the utility bills and some renovation costs have to be paid whether he has the tenants or not.

By the fifth month some of the tenants are becoming unruly and the council are stopping rents for the most ridiculous things that some the tenants have or have not done. By the sixth month some of the tenants are deciding to move on as the last tenants in are not as sociable as the first ones might like, especially when all are single men receiving LHA benefits there can be some friction. The situation generally escalates and the leaseholder struggles to keep together his own sanity let alone keep paying the bills. He then decides to sell on the lease to a third party to relieve him of his stress and he puts the expense down to education.

In the meantime the house owner gets mixed up in a business deal with her new man where she borrows a considerable sum off a third person. Her new man ends up losing the money and scarpers leaving her with the debt. Her only valuable asset is the house she has leased out on a lease option for five years. Finding that the first leaseholder had sold on the lease is an ideal opportunity for her to rescind it and claim back her property, sell it and repay her debtors. She therefore refuses to take payment from the second leaseholder saying that there was no right to transfer the lease and she wants possession of her property back.

The second leaseholder refuses to accept this; he finds tenants, manages the property and takes the monthly rent roll but does not pay the house owner her dues, even though he admits he owes the money, preferring instead to wait until the house owner has to take action against him to get back the property and outstanding funds. Typically any action of this type can take at least a year to come to court and this is no exception. With rent monies being accrued and over the months towards the hearing date, the utility bills are not being paid.

However as the lease was signed by the first leaseholder, he also has to attend court to defend his action and when the second leaseholder simply doesn’t turn up at court for the possession hearing, the Judge grants possession back to the owner but action for repayment of the debt becomes delayed yet again with the home owner now seriously out of pocket.

When on the second hearing the first leaseholder is found equally liable for the debt of the second leaseholder he is forced to sell one of his own houses to pay towards the debts incurred after his dealings with the property had ceased. As per usual the people who make the most out of this kind of scenario are the solicitors, but how many unwary people are getting into these types of deals every day without realising the full potential of the liability they may be opening themselves up to.

Lease option, rent to rent, and rent to buy deals are the buzz words in the property world and many see them as the way to make their way into property when they have little funding behind them. Even for the experienced they can be a minefield. We suspect many more similar tales will be coming up over the next few years. Nothing is without risk but there are reasons to stay with the traditional ways of doing things. With the rise in business, life and of course property coaches who generally have less successful deals under their belt than they make out, we suspect a lot more people are likely to fall foul of advice which is not necessarily suitable for their particular circumstances.

There are many people who advise others on their journey as long as it helps them earn more. There are very few of us who help clients by looking at their overall wealth and ability and deciding on the best course of action for them with all the alternatives available. It doesn’t necessarily mean that all lease option deals or rent to rent scenarios are necessarily wrong, just that anyone who takes on any commitment must really be in it for the long haul.

Always realise what you’re letting yourself in for.

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Lease option or no option

Sometimes lease options are no option

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