Now before in “How To Become An Options Trader” I spoke about the two Ps in options being:

1. Price
2. Period

Well I have another P for you:

1. Profit!

Profit is based on the difference between what you can rent the property off the owner for and what you can get on the open market. So look at this example:

A property has a market value today of £100k. You find a seller who will grant you an option to buy this property in 5 years time for £110k.

So the Price is £110k

And the Period is 5 years.

He will also let you rent the property off him at £300 per month as his mortgage payments are £300 and he just wants rid of the property. You know that the property will rent out no problem for £500. Then the potential profit to be made every month is £500 - £300 = £200.

This profit is possible every month for the next 5 years. So the overall profit would be the total number of months in 5 years multiplied by the monthly profit being:

5 years x 12 months x £200 = £12,000.

So if we were to stand back and look at the deal now the 3Ps would be:

1. Price: £110k
2. Period: 5 years
3. Profit: £12k

Previously I valued the option (without the lease element) at around £30,000 potential profit. (see How To Become A Options Trader). Now we can include the potential profit of the renting of the property which is £12k.

If we were to ignore inflation for a minute we would have a lease option with a potential profit of £30k + £12k = £42k.

Why Lease Options Are So Exciting

The reason why lease options are so exciting is because you can get on with your investing without the need of finance straight away. They fast forward your buying as you can take control of many properties very quickly and literally build massive portfolios in months even weeks.

The reason why I use the word invest is because as long as your options have the correct Ps being:

• Price
• Period
• Profit

Then you will own that property without a doubt. I really want you to understand what I just said there. It is vitally important that you do understand that last sentence. You can own the properties which you are controlling by way of lease options.

Now there must be quite a few questions pinging in to your head right now. Trust me, it happened to me. It is a normal reaction! If no questions have arisen in your head then either:

1. you do not understand it
2. it is not for you

If you are in category 1 I suggest you re-read what I have spoken about on options as this is only the theory. It is important to understand the theory before you embark on purchasing options.

If you are in category 2 then this is ok. It is not for everyone. It can seem a lot of faffing about however it is only an invention from necessity. Once the mortgage market comes back then we are back to normal however lease options can be a true no money down system without the need for finance.

1. Buy properties for 50p

This is the real reason why you can become very wealthy with lease options. You can take FULL control of a property by paying a notional sum like 50p AND end up buying it. This is no joke.

This is best explained by way of an example. Let’s just say you have found John who is in the following predicament:

• John has lost his job
• His mortgage is £100k
• Value of home is £75k

John is trapped in negative equity. He cannot afford the mortgage and just wants rid of the property. He cannot sell as the mortgage company will not let the shortfall become an unsecured debt. This property is unsaleable. Or that is what John thinks anyway.

What John needs is someone who will pay his mortgage for him. This is where you step in. You can propose the following to him:

I will buy your property from you at £100k in X years AND I will pay your mortgage for you up until I buy.

From John’s point of view this is as good as selling. There is no more financial liability falling on to John. John is FREE!

What you have now is the liability. You have to pay John’s mortgage but this is no problem as you can rent it out to cover the mortgage payments and then some.

So where does the 50p come in then? Well if you think about it how much do you think John needs you? He needs you more than you need him. So effectively John would pay you to take on his mortgage! However John has no money and you are not willing to part with any cash so a notional amount is prescribed to make the contract valid.

Contracts need a thing called consideration. Consideration means there has to be something in it for both parties to make a contract valid. So John gives you his property and you give him 50p! Sounds crazy but houses are exchanging hands for very small sums of money!

But remember once you pay the 50p the property is yours. Now before you get visions of handing over a 50 pence piece and getting the keys there are a few more steps in between – like using a solicitor. However you can say good bye to quite a few people that used to be involved in buying properties.

1. Say Good Bye

When you buy a property you needed to follow this pattern or thereabouts:

• View property in Estate Agents (cost to vendor up to £5,000)
• Instruct broker to get mortgage (cost to purchaser 1% of loan)
• Instruct survey (cost to purchaser up to £500)
• Mortgage application and arrangement fees (cost to purchaser up to £3,000)

Well you can say GOOD BYE to all those costs. Neither the vendor nor you have to pay for any of these costs as you are not actually buying the property YET. These costs will come in to play (apart from estate agency fee) when you exercise your option to buy.

But not only can you say good bye to them they now lose the power they had over us investors before. The power to say:

• Surveyor: No, this property is not worth what you think it is
• Mortgage Company: No, we will not lend to you

They have no power as they are not needed for the deal. This is a great feeling. If you have tried to buy you will know how frustrating it can be. Here at the Lease Options Brigade we like to say YES!

So you can say:

• YES, I will take your property on
• YES, I will buy your property in the future at the price you want now
• YES, I can set you free

You are no longer a greedy investor to them but a saviour. How nice are you?

So who do you need to do lease options. You need only one professional:

A solicitor.

I strongly recommend you use one. They will make sure that searches are done on the property, the option is registered with the Land Registry and they will include all the things you have agreed with the vendor in the correct legal way.

A solicitor will register the option which prevents the owner obtaining more finance or selling the property without your knowledge. This is VERY important as an option without registration means you have no protection. You then are only left with Court as your only remedy which can be expensive and no guarantee of either a win or successful payment of damages.

You could to be extra safe and instruct a basic survey. This will ensure that the property is mortgageable. Most properties are but the property could be suffering from subsidence which can be difficult to spot so it is best to be sure. Using a surveyor is recommended but again not essential.

You need the property to be mortgageable to purchase the house in the future when you exercise the option.

1. Yours and the vendors responsibilities

Ok, so you now have control of the property. What happens next. If the property burned down tomorrow are you at a loss?

There are many things that need to be set out so everyone is clear about who is responsible for what. This will all be taken care of by the solicitor however I want you to not forget these basic principles:

• The property is still owned legally by the person who granted the option NOT you.
• You only have control of the property and the right to buy the property at an agreed price within a certain time period

Your Responsibilities

You have to make sure that:

• You pay the mortgage on the property. I would suggest you pay the mortgage company direct. This way you know the mortgage is being paid.
• The property is maintained. So the day to day risks of ownership fall to you. So if a tenant reports a leaking tap then you have to fix it.
• You are available to speak to the owner of the property. This is a relationship you have here. The property still belongs to the owner so it is only right that you are available to speak to them. Circumstances can change and you need to be able to communicate and adjust if the need ever arises.

Their Responsibilities

• They have to make sure the building is insured. There must be at least buildings insurance to cover for Fire, Lightening, Explosion & Aircraft (FLEA). The cost for this should be agreed between the two of you. I would recommend you pay this and pay it direct to the insurance company and keep a copy of the cover note or insurance certificate.
• To get permission from their mortgage company that they can let the property. This is quite important as if the owner does not get permission and they find out they can demand full repayment of the loan. In this climate that could be disastrous.

1. Determining and finding the right properties to get an option on 

There are plenty of properties for sale out there. MOST are not worth buying! If I were to estimate the percentage of properties that are for sale and are worth buying I would say it is about 0.7%. That is to say about 1 in every 140 properties on the market are worth investing in.

The way you determine what is worth buying is looking at the yield. Yield is defined as:

Annual Rent divided by purchase price.

Simple is it not.

So a property that rents out for £5,000 per year and costs £50,000 to buy has a yield of:

£5,000 divided by £50,000 = 10%

So that’s what yield is. So what is a good yield? Well this is where most properties fall down. A good yield is:

10% or greater

So a property that rents out for £5,000 is worth buying if it costs £50,000 or less and not worth buying if it costs £50,001 or more.

I really want you to master this calculation. There are plenty of others but this is the key one. If anyone has a property for sale my first question is “what is the yield?”. If they cannot answer I ask the questions so I can determine the yield which is what is the price and what will it rent for.

Over my time as an investor I have found that properties priced less than £100,000 have the potential to yield over 10%.

I would aim for these sort of properties. Properties with a 10% yield will give you good positive cashflows in the long term. You do not need to worry about interest rate rises (unless it goes beyond 10%) as the rent will more than cover the mortgage which you are now responsible for paying.

1. Renting out the property

With options you are effectively renting out properties you do NOT own. This has implications. You cannot create a tenancy with a tenant just because you are paying the owners mortgage.

What you need to do is:

1. Position yourself as a letting agent and get a “Management Agreement” in place with you and the owner. Then have a clause in it where you are entitled to keep the surplus of the rent over the mortgage costs as a management fee.
2. Create a tenancy with the tenant and the owner

A management agreement contract is included within this package as well as an Assured Shorthold Tenancy agreement so you can start earning from your lease option as soon as you find one!

1. Grooming yourself for purchase

I am not sure if you have ever been on the receiving end of a police officer for a minor altercation but message is the same as his:

“STAY OUT OF TROUBLE”

What I mean is do not get in to trouble with any company that can affect your credit file. It is the credit file that lenders use to determine whether you are a good bet and this file records what you have been up to for the last 6 years.

To stay out of trouble you need to: