Over the next few weeks, we shall look at how we may not actually require any financing at all, at least to begin with. We will consider how we can leverage an existing property owner’s asset and potentially their existing finance to fund our property investments. Today, we start with my discussion with Tom Appleton, a former professional footballer that ended his playing career in the USA before returning to the UK to build a property portfolio using lease options in the most part.
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Resources mentioned
Book reference: Escape The Rat Race – Barry Davies
Contact Tom: tom.appleton01@gmail.com
Richard & Damien’s 360° Property Business Workshop or drop me an email to be added to the wait list for our next event instead, podcast@thepropertyvoice.net
Link to the Podcast feedback survey
Today’s must do’s
If you like the idea of lease options, then I would suggest doing two things:
- Reach out to Tom and ask him about his experience at the coal face
- Get yourself fully educated and represented by a solicitor that has experience in such structure (I can point you in the right direction here)
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Transcription of the show
Hello and welcome to another episode of The Property Voice podcast. My name is Richard Brown and it’s a pleasure to have you join me on the show again today.
As I mentioned a couple of weeks ago, we are starting to get more alternative and more creative too when it comes to property financing methods. Over the next few weeks, we shall look at how we may not actually require any financing at all, at least to begin with. We will consider how we can leverage an existing property owner’s asset and potentially their existing finance to fund our property investments.
The next two weeks are all about lease options, as we speak to both an investor and a deal sourcer that specialise in them. Today, we start with my discussion with Tom Appleton, a former professional footballer that ended his playing career in the USA before returning to the UK to build a property portfolio using lease options in the most part.
Let’s have a listen as Tom’s shares with us his experience in applying lease options as a creative financing method for property investment.
Richard: So, here we are again on The Property Voice, part of the third series, where as you know, we are looking at financing in particular, creative financing techniques in property. And I’m very pleased to say that I am joined on today’s show by Tom Appleton. I will let Tom introduce himself, but I am particularly interested in his background, and his sort of relative normality if you like, he is going to talk particularly I think, about Lease Options, how he got into it in the first place, but Tom, are you there?
Tom: I’m here Richard, how are you?
Richard: Yeah I’m absolutely fine, thanks very much. It’s really good to get you on the show, thanks for joining us today.
Tom: No worries at all.
Richard: Great, well, let’s just get straight into it then, I like to move through these questions quite quickly, give the listeners something to chew over. But, could you just give us a brief outline and an introduction to yourself, and your background, and in particular, your specialist knowledge and or experience in the area of creative finance in general, but Lease Options in particular?
Tom: Of course, yeah. So, I probably came back from my footballing background. So, I played football in my youth, then I played for professional teams till I was 18. I went to university, did three years at university, then after that I thought, I’m going to get back into doing something with this football. So, I went to America and played football in Los Angeles, very fortunately. Sadly, I got a very serious injury, after a year a or so, so I was looking for other things to do from that point. Although I was very interested in property when I was at university, I came across a lot of property investors, obviously, your landlords, all that sort of stuff. So, when I was in Los Angeles and got this football injury, I came across a few people who were fairly big property developers over there. They had a few businesses in property and various different things. And, obviously, that got me very intrigued. So, I met with them more and more as the year went on, and I’m not sure if you know or not, but Purchase Lease Options are actually fairly common in America. So, although in England they aren’t, they are not that common, in America they are. I know a lot about Purchase Lease Options in America, how they are done, and various different things around that area. So, that’s initially how I got introduced to Purchase Lease Options. I was in America for another 2 years’ after that, I didn’t do anything myself in property but I had learned a lot from these, now friends, that I had met over there. I set up my own coaching academy, my injury got too bad, so I ended up coming back to England. I thought well, I really enjoy property, it’s something I really want to get into. So, I started plotting my property journey when I came back to England. And obviously, I like the strategy of Purchase Lease Options. They weren’t that common in England so, I thought it was something I could take advantage of.
Richard: Yeah, and when was that, when you came back to the UK, Tom?
Tom: I came back at the start of 2012.
Richard: So, just four years ago, still quite a young man then I guess?
Tom: Yeah, I have just turned 30.
Richard: Congratulations!
Tom: Not too young anymore.
Richard: Yeah, I suppose that’s one way of looking at it. I tell you what, someone who likes football and property is definitely a man after my own heart anyway. So, it’s easy to talk to you that’s for sure and fascinating that at uni you got into property, presumably looking from the tenant point of view at the landlords, at that moment?
Tom: Yeah, I mean, probably my second year of university, I was going on a viewing to view a few properties, and I got picked up in a Range Rover, and I was thinking...this guy seems to have done ok, I have got to get speaking to him. It turned out he wasn’t the letting agent, he was the owner of the properties. So, that sort of got me intrigued, as a young 19-year-old, how this guy…that’s what really got my attention around property from that early age, while I was at university.
Richard: So, well done. And I agree with you actually, that in terms of Lease Options, or Purchase Lease Options as you like to call them, they are more popular in other places, particularly the US, I think Australia as well actually. They are growing in popularity here but, we often tend to get what The States gets about 10 years later, so you are ahead of the game in that respect. Why don’t you just tell us a little bit about Lease Options, or Purchase Lease Options, as you like to call them, what are they exactly?
Tom: So, the Purchase Lease Option, basically is a delayed purchase. So, obviously, you will set a certain timeframe you will lease the property for. So, you will lease the property from the landlord, and then the Option side of it is a set Purchase Price, you will agree with the vendor, then you can exercise that Option, any time in the period you agree with the vendor. So, say 5 years, you can agree with the vendor, that you are going to purchase this property anytime within the next 5 years. You will then lease the property in the meantime so you can use it for the cash flow, which of course we will talk about a bit more later. And then the Option side of it is the actual purchase of the property which is a set price.
Richard: Ok, so, basically…did you say a deferred purchase?
Tom: A delayed purchase.
Richard: Delayed purchase, yes. So, that would be different to say a deferred completion type of contract. It’s just an Option, to buy it at a future date. So, just drilling into the detail a little bit, in terms of how it might work in practice, just talk us through the things you kind of look out for in a typical Purchase Lease Option transaction. Things like, how long a contract it might be, lease or rent payment levels, the option, just talk us through some of the mechanics or the components, if you like…
Tom: Of course, yeah. So, I primarily invest in HMOs, I have got a fairly large portfolio of HMO properties, and the normal sort of thing you will find with HMO properties is, they are owned by landlords. So, it would depend on what sort of issues or problems they have got with that property. A lot of the time, it will be that they can’t rent the property out. The property is very tired, it’s not attractive to tenants anymore, there might be an occasion where they have got negative equity on the property, things like that. So, that it’s the motivation from the Vendors side, of how it might work. So, when you are then negotiating with the Vendor—I mean a Purchase Lease Option can be sort of any, it’s a contract you can do anything with really. So, you can give it any sort of length you want on the time you are going to lease the property for, and you can agree any sort of Purchase Price. So, a typical length I like to do, is anything between 5-7 years and that’s basically because it’s a long enough period for some capital growth on the property, but it’s obviously not too long where, I don’t know, 10, 12, 15 years down the line, where the vendor might not be too happy with leaving it that long, or I mean, even yourself, you want to eventually own the property outright. So, I like to do between 5-7 years, it’s a good time for capital growth, also, not too long where you can make the purchase and own the property then.
Richard: So, typical length, obviously, that’s flexible, but you like to aim at 5-7 years, it gives an opportunity for a little bit of capital growth to kick in. So, that looks at the Purchase Price bit. Now, you are agreeing to buy that property today, but, you won’t actually pay for it till 5-7 years’ time. What, typically, would you set the Purchase Price at? What are the drivers that would determine what that Purchase Price in 5-7 years’ time might be?
Tom: So, again that comes down to negotiation with the Vendor, but primarily you want to get what the market value is of that property today. For example, in my area in Leeds, where I invest, you might get a 5-bedroom HMO at the market value of £200000 today. So, you will get an Option price of £200000, then obviously, you can purchase it at that price at any time during the Option period you have. Obviously, I normally do 5-7 years. So, I can purchase that property for £200000 any time within 5-7 years. Obviously, that then gives you the advantage of hopefully, getting some capital growth within that time.
Richard: Ok, so you would normally try and set the Option Price in the future, at todays’ market value? And I guess, that’s probably because you are using the HMO strategy as well and you can…we will come on to it, but I daresay you are making some decent cash flow out of the property as well, is that right, yeah? Could be a scenario though, and I know what you have said is basically you can do anything you want with it, you need to understand what the Vendors position is and what their motivation is. But, for arguments sake, if the market value today, was let’s say below their mortgage, I presume that might have an influence on what the Purchase Price might be as well?
Tom: Definitely yes, I will give you an example of one of mine I did last year. This was a 6 bedroom HMO, the landlord was still wanting to rent it out but, he had obviously all the regulations, he had a HMO licence and everything, but he couldn’t rent it out, it was looking very tired. So, this landlord bought at the height of the market, back in 2007, which was a very inflated price, so, he actually had a mortgage on there for £220000, and the actual value of the property today is about £190000, £195000, so, basically when we were negotiating the Option, obviously, you want to be as fair as possible with the Vendor also. Sort of come to a win/win agreement with them. So, basically, we set the Option price at £220000, which was his outstanding mortgage. I’ve actually got a slightly longer one on that, its 8 years on that one, which is probably the longest one I have done, but because that was the top length of his mortgage as well. And, obviously, because of there being a bit of negative equity there, you need a bit more time to come up in value, so when I come to exercise the option, hopefully it will have gone over the mortgage amount and also a bit of capital growth for myself as well.
Richard: Yeah, well. I want to kind get into the motivation and drivers from the owners point of view in a second but, just to sort of pick at the bones of what are the typical components. I guess there are two other bits we haven’t talked about too much. One, is the lease bit or the rent payment and the other bit is the Option fee. So, what’s typical for those types of things?
Tom: So, the Option fee, typically is £1, and that is what it takes to exchange on an Option. it’s also why it’s very attractive to investors and things as well. So, that is a typical amount you would pay to get the Option.
Richard: Sorry Tom, so you pay that beginning that £1?
Tom: Yeah, so, through your solicitor, you want both sides to be represented by solicitor, and I have my own solicitor that I use for all my Purchase Lease Options, and everything. And then, I can recommend a few to the Vendor, if they are not too sure of any that specialise in that area. And then, through the solicitors, you would then exchange on that Purchase Lease Option contract for £1, typically what you would pay. Obviously, you have got solicitors fees and all that sort of stuff on top of that. Regarding the lease thing, that obviously again is negotiable. The great thing about the Options is, for me anyway, I’m quite entrepreneurial, I like that side of it, the creative side of things. You can be very creative with these things. And obviously, the solicitors are drawing up the contract, you can put forward how it’s going to work. It’s a great thing for investors, if you like that sort of thing. So, again, you are looking for, does the Vendor have a mortgage on the property, how much the mortgage is, what their interest rates are, is it variable, is it fixed, how long is it fixed for? So, you want to get all that information, because obviously, you can’t help the Vendor out if you are not aware of that in the top negotiator or the top Purchase Lease Option on there. So, for example, if the Vendor has got a mortgage of £600 per month, make the numbers easy, then they are paying that every single month, you can sort of negotiate a good price, with the Vendor on lease per month. So, again, if their mortgage is £600, you can sort of…I personally like to make it a bit more attractive for the vendors, so I might start my negotiating slightly higher than £600. So, if they are making a bit of cash flow during that time as well, it’s more attractive to them as well, they are getting something out of it. And obviously, that determined by what you can rent it out for as well. There are occasions where you might only be able to cover the mortgage, so that’s would make it work for you, cash flow wise for yourself. So, yeah, basically they might have a mortgage for £600, and you may pay a lease fee of £700-800, so it makes it very attractive to the Vendor also. That’s a set amount, so obviously, once the contracts are drawn up, you are legally obliged to pay that lease fee every single month. Just like you would with a mortgage payment. Obviously, that paid to the Vendor once a month, during the length of the Option Period.
Richard: So, its guaranteed payment to them effectively then, isn’t it?
Tom: Yeah, definitely, guaranteed payment to them. I treat all of my, any Option I go into, I treat it as if I am definitely going to buy the property, and you will be doing the right thing, the Lease Fee is basically a mortgage payment to me. I see it that way, you are legally obliged to pay the amount.
Richard: It’s interesting, because you have kind of pegged your Lease Fee, I appreciate what you said though, it’s flexible and you can just discuss and negotiate. It sounds like, you try and peg your payment to the owners’ mortgage payments. You didn’t mention market rent there and I am just curious about that. I guess, that could be something else you could peg it to, is that, would that be fair?
Tom: Yeah, the thing you have got to look for, is what is the average amount each month for the Vendor. Obviously, it varies on which strategy you use, so, again say the mortgage amount is £600, but the rental amount for that area is only £550, obviously, it wouldn’t work. So, you have got to, sort of, look at those things. With HMOs, obviously, you can get much more rental income. So, you might have a mortgage payment of £600, but the rental now that you can get in that area might be say £1500-£1600 per month. So, then it works a lot more in your favour as well. And also, also the Vendor is happy because you might be paying the £700-£800 on the Lease Fee.
Richard: So, I think that’s great that you start from the position of the issues that the Owner or Vendor might have, because sounds to me like, you are trying to, almost, tailor make, a proposal, which fits their needs. Is that fair?
Tom: Definitely and I think that is definitely key for creative finance and deals like this. If you were going there and throwing a proposal at a Vendor, it might not suit them all. You see, if you don’t know what their mortgage payments are, maybe it’s £600 per month and you say, well, I will lease it from you for £400, if they if they do agree to that…sadly some people get into bad situations, and they might be that desperate that they agree to your Lease Fee of £400, their mortgage is £600, and then 2-3 years down the line, because they agreed to this bad deal, they start getting into trouble, any problems, that’s going to have an effect on you as well. If that Vendor can’t make the mortgage payments, because you are not even covering them, if they went bankrupt or something, then obviously, that’s going to affect you as well. That could affect your Option.
Richard: Yeah, exactly. So, we will come onto that, maybe some of the potential downsides later I think, if that’s ok. Just to finish off on this section though, you personally like HMOs you mentioned. When we first spoke, I know that you mentioned other things, but do you think you can tie other types of rental strategy to a Lease Option? Or indeed, not necessarily rental strategies, but what else can you do once you have got the property, what other property strategies would you consider, in other words?
Tom: Yeah, again, a different thing…I have got a couple of single lets that I have done Purchase Lease options on. So, again you can do it on single lets, obviously, the mortgage payments might be £100-£200, you can cover that, you can maybe rent it out for £400-$500. You can LHA strategy as well, I don’t personally do that, but you could get a Purchase Lease option on a single let and you can use the LHA strategy and you can get much better income from. There is also flipping properties on this, so, you could do an Option, lease the property short-term, you could give the property a refurbishment, add some value, do some small development, maybe add a conservatory or something. So, it might be more of a short-term Option, maybe 6 months’, 12 months’. If you do the property up, or you can sell it and sort of make the equity growth, that you gained on the development side of it.
Richard: Yeah, and I guess you could also do tenant buyers or things like that, couldn’t you? Or, more long term…I guess what we are driving at is, it’s quite flexible.
Tom: Yeah, definitely. So, again. Like I said, it’s a strategy I really like, you can be very creative with it. Its tailor made to suit the Vendors needs and also your own needs, which makes it a very win/win sort of situation. And, why for me, it works a lot with Vendors, and people in situations like that.
Richard: It’s interesting you say, it works a lot with Vendors. I guess, in the downturn we had roundabout, you know 2008-2010, in particular, one of the most obvious drivers, that people might have had at that point in time is, negative equity. And you mentioned that earlier, but is that the only trigger or motivation, why an Owner or Vendor might consider to do a Lease Option? you touched on a few, I’m just curious to know if, in other words, is Lease Options only suitable in a down market, or is it suitable in other situations and other market cycle positions as well?
Tom: Yeah, I’m of the opinion where there is always Purchase Lease Options out there. The market does sort of dictate sometimes, obviously in a down market, where people are, as you said, in negative equity, things like that, there are going to be a lot more opportunities to do Purchase Lease Options. Because the market has picked up a bit now, I’m finding they are not as many Purchase Lease Options, but they are definitely still out there. And, so I personally think they can work in any sort of market. Again, because they are creative, they are flexible, you can come to a good agreement with both parties. I think they are really good. I mean, there are all different sorts of situations, I have got a few of HMO properties, where the Vendor was in negative equity, but I have got a lot them where, sometimes they might be an un-incumbent property. So, they have got no mortgage on the property, I have got one occasion where, the Vendor doesn’t live locally, they actually live down South, but the property was looking a bit tired, but they had no mortgage on the property. So, when I spoke to the Vendor, I said well if you sell the property, what are you going to do with the money? They said probably leave it in the bank, so, again can be a lot more creative and this is where that sort of, creative side, comes out. So, I said well if you put the money in the bank, you are going to get 1 or 2% in the bank, this is an opportunity I could offer them a Purchase Lease Option, I said well, if pay you say £800 per month Lease Fee, guaranteed rent every single month for 5 years, that’s going to be 6% a month rather than what the bank would, 2%. So, again, that a situation where the Vendor was well-off, they had a great job, no problems, un-incumbent property, but I sort of tailor made a solution. Our probably made much more sense to the Vendor, to make more money during that time as well, they got the Purchase Price they wanted, during the Option Period, they obviously made a much better interest rate, than putting the money in the bank.
Richard: I guess, you are really going to drill into this in a second, in terms of how do you find these people. But, you are touching onto the potential benefits, and I wanted to just ask you about that. You know, what’s in it for the various stakeholders, you have got the property owner, you, as the property investor and you have got tenants, broadly as the stakeholders. What are the typical benefits that each party might look to with a Purchase Lease Option?
Tom: So, basically, from the Investors point of view, my strategy, so I will give you the example there, which I just used. I did this deal in I think, it was about a year and a half ago now. So, we agreed on a £800 Lease Fee, every single month. We agreed on a 5-year Option period, at a Purchase Price of todays’ market value. So, the Lease Fee is £800, I personally rent to professionals, so, I do an all bills included package, for the tenants as well, so all bills included, so normally about £350-£400 a month. I do, obviously, a TV package, Wi-Fi, all that sort of stuff, which from a tenant point of view is very good. And then I can rent that property out for £2300. So, I make like £1000 per month on that property, cash flow net. From the Investors point of view, you are obviously making great cash flow there, I have got an Option price now, so in the next 5 year, it’s very likely I will get some good capital growth there as well. From the Investors point of view it’s great at getting both cash flow and capital growth. From the Vendors point of view, in this situation, again, they didn’t live locally, so it was a bit of a hassle for them, they couldn’t get it rented out, it was tired, they had to spend a bit of money on the property, it was un-incumbent, they had no mortgage on there. So, from their point of view, they are going to make more money than they would selling it now. Plus, they were just going to leave the money in the bank. So, I’m giving them a higher lease fee, guaranteed every single month. They are making…I think it worked at something around 6.2% a month, rather than the 1-2% sitting in the bank. So, from the Vendors point of view, they are making much more money, it’s no hassle for them, guaranteed. Not have to find tenants, not have to find money for maintenance, all that sort of stuff. It’s completely passive for them. So, from their point it looks great as well. And from the tenants point of view, so, during this period I have creative a management company around my HMOs, privately managed, I have my own property managers, all that sort of thing there, which privately manage my properties. And we try and do it all to high standard. We want the service to be good, all the all-inclusive package, we have cleaners twice a month who come around and clean all the properties and make sure the standards are kept high. So, form tenants point of view, from that sort of angle of it as well, the tenants are getting a great house to live in, in a great location. So, that’s sort of in my opinion, why it works so well for each party.
Richard: Yeah, I can see that, there is definitely triggers of interest for all parties with this strategy. So, I have got to ask you then, how do you find these people then, that will agree to Lease option their property to you? Because they are not advertising on Rightmove, are they?
Tom: No, they are not! So, basically, I go straight to the Vendors, try and market straight to the Vendors. Obviously, because my strategy is HMO properties, I look for a certain size of property in a certain area. So, in Leeds, big university city, there is a lot big properties like that where they sort of, live and everything. So, I target those specific areas. So, I will do letters straight to Vendors, if we see a certain amount of properties that we think are very suitable to HMO. You can go on the Land Registry, pull off the details or send a letter straight to them. Agents, as well. A lot of the time, agents can be very receptive to Purchase Lease Options as well, Letting Agents in these sorts of areas. From a Letting Agents point of view, they are looking at the properties, they are a complete wreck, the landlord doesn’t want to spend any money. It’s very difficult for them to get it rent it out. If you are going to speak to the Letting Agent and saying, look, I’m going to spend a bit of money on this property, doing it up, making it look nice, it’s going to make it much more easy to rent out. You can sort of give them a finders’ fee, or something so it’s a win situation for the Letting Agent. Obviously, you can get contact with the landlord that way. Which is a strategy that works very well also.
Richard: So, direct to Vendor as you say. I like the personalised approach. So, basically you find the property, then track down the owner and then write to them individually, yeah, I guess?
Tom: Yeah definitely. Things like the HMO register and all that sort of stuff as well. There’s the owners, property that they own, their address so you can send letters to their address, do that as well. And a sort of personal approach. Approaching them personally and seeing if they have got, you can sort a solution for any problems they might have with the property.
Richard: Great, and I guess from the Agents point of view, you are talking Letting Agents point of view. If you can, reduce their hassle, make their life easier, but also potentially, they still get some sort of financial reward; a finders’ fee or ongoing Letting Agents fee, I suppose, could happen as well, couldn’t it?
Tom: No, definitely. From the Letting Agents point of view, they have got a property that is pretty much impossible to rent out, they are not going to make any money on it, it’s becoming a hassle to them. You can say to them, look I will pay you a finders’ fee, come to an agreement with them, then you can give them a financial reward also, so that it benefits everybody.
Richard: Ok, brilliant. If someone is looking to get into Purchase Lease Options now, what sort of advice, or general tips and pointers would maybe give to them if they are starting out today?
Tom: Definitely educate yourself. So, I mean, I met a few people in America where it is a bit common. I sort of, sought them out afterwards, found out a bit about them and what they did, and I sort of tried to spend as much time with them as I possibly could. Sort of, like a mentor, if you like, where you learn as much as you can about a certain thing. And it was the same when I came back to England. I found, I tried to find people doing these sort of strategies, how were they finding them, what are they using? So, you can really educate yourself on it. Education is really key in this sort of thing, you don’t want to go in there and do something wrong. You want to be able to speak to them the right way, the language you want to use when you are talking to them, things like that. Which I think is really important. So, I’d definitely say, that educating yourself in that area. It isn’t that common anymore. A lot of people won’t have heard of it. So, if you do educate yourself you can come about it in the right way.
Richard: Yeah, I mean, it’s a good point, because if you walk into a Vendor, pretty much first meeting and say ’How do you fancy a Lease Purchasing this to me, and I will buy it from you in 7 years’ type of thing… they are just going to look at you as if you are bonkers. I’m pretty sure, you don’t actually put it to them that way, even though that’s the structure we have been talking about…
Tom: No, definitely. You can get into the language you want to use. So, you go into a Vendor, and I’m sure if any of your listeners are listening now, they have never heard of a Purchase Lease Option, so if someone came up to you and said ‘Can I buy your house on a Purchase Lease Option?’ you would be like, what do you mean, what’s that? You would probably be frightened from it. So, you want to approach it in the right manner, again, using the correct language. So, it might be, I am interested in your property, but it doesn’t make sense to me now financially, whatever the situation might be, but I could do it over a delayed period of time, and that when you can start negotiating on the length of the Option, obviously you would find out things like mortgage payments, if they have got them, things like that. Then you can negotiate on that. And then maybe a bit further down the line, you can start using language like, this is a Purchase Lease Option. But definitely initially, you want to be using, basic language, things like a delayed period of time, a delayed completion. I want to purchase your property, but in the future, things like that, to make it much accessible and easy for people to understand.
Richard: Yeah, and I guess, you have to be prepared that not everybody is going to get it. And you have go and talk to quite a lot of people, before you get that yes.
Tom: Definitely, again with these, you have got to speak to a lot of Vendors, because it might not suit that persons’ needs. You can’t force something that’s not going to work. So, you have got to find people where it is a good solution for them. There is no point in trying to make something fit that doesn’t.
Richard: Yeah. So, we talked about some of the upside, we talked about how to approach people or find the deals in general terms. But, what about the kind of ’gotchas’, things to watch out for, the downsides of Lease options, what should people be aware of to protect themselves?
Tom: Definitely the main one, is make sure you use solicitor, because obviously, these are contracts, you hear of some horror stories. People just doing these on one piece of paper and saying, just sign here, this is our option Agreement. If something did happen in the future, there was any problems or arguments with the Vendor, which obviously, you hope would never happen, then, whether that would stand up in court, this Option Agreement that you have drawn up yourself, is very, very unlikely. So, you want to make sure you are both represented legally by solicitors. Like I said previously I have got my own solicitor that I use for all mine now. But, they are absolutely brilliant, specialise in this sort of area. I know a few other ones that I can recommend to Vendors if they are looking for them as well.
Richard: The key there was for both sides to use a solicitor, wasn’t it?
Tom: Yeah, definitely. So, you want to make sure the Vendor is getting represented legally also. So, that they can get the correct advice, all that sort of stuff. To make sure they are aware of everything, how it works, all that sort of stuff.
Richard: So, the legal representation is one. Just on that subject, do you have to register anything at Land Registry?
Tom: So, basically, the solicitors will do it. So, they will probably put a legal note on Land Registry. The option will go on Land Registry basically. Once the contract has been signed and everything, it is like a lock out agreement, so, the Vendor can’t sell the property without notifying you. At the end of the day, if the Vendor did try to sell the property, and you have got the Option on there, it would be flagged up straight away, at Land Registry, that you have got this Option. you would have to be notified before that could happen. Which obviously means that, if you have got this Option, you are not going to go on and sell it so, a good thing to know from the Investors point of view.
Richard: And, just to be clear, you mentioned earlier, if the Vendor has a mortgage and maybe doesn’t maintain payments, that there is a potential risk there, isn’t there? If, for whatever reason, payments weren’t kept up to date, the Lender could step in and take their property back, couldn’t they?
Tom: Definitely. Something I do, if they do have a mortgage on a property, I will pay the mortgage direct. So, you can speak to the mortgage company before the contracts sorted and say to them, I will be making the payments. And then you can make the payments direct to there. It does depend on the Vendor also, if you have a great relationship with this Vendor. I have done, for example, Purchase Lease on a single let property with a family friend. But, this is probably a few years ago. And what they do, instead of me sending straight to the mortgage company, they send me proof of payment every 3 months, of the mortgage. There are different ways of doing it, but I would definitely recommend pay ing straight to the mortgage lender. But, if that’s not possible, things like getting proof of payment, every 2 or 3 months would definitely be recommended.
Richard: Ok. You said talk to the mortgage company, do you need permission from anyone to do this?
Tom: Yeah. On HMOs and things, they are always Buy to Let mortgages so, you have got permission anyway. On Single Lets, if it’s a Single Let where it’s a residential mortgage, you are going to have to get permission to let. So, you will have to speak to the Vendor and make sure they sort of get that before you would look at doing the Option. And also, if we are renting it out.
Richard: And what about things like, your maintenance and repairs on the property during the course of the Lease Period?
Tom: Yeah, so for maintenance and things, it’s the responsibility of the Investor. So, all my HMOs things like that, when I put the proposal forward, it’s the one thing again, that’s attractive with the Vendors. You are taking over all maintenance and all that sort of stuff form them as well. And, I like to do it that way as well. Like I said to you previously, I go into every Lease Option with the view that I am going to purchase the property, this is my property. So, you want to make sure the maintenance is done, you want to make sure that its done to a good standard that you want it doing. So, that’s how I like doing it from that angle as well, so it’s all covered.
Richard: I guess you could negotiate that, couldn’t you? You could say things like, anything that happens inside the property, you will be responsible for. Anything happens to the front brick, like the roof or you know, the external walls, would be down to the Owner. I guess you could negotiate that, couldn’t you?
Tom: Yeah definitely. Things like structural damage, so, most Options will be you are covering maintenance and that sort of stuff, but anything structurally, like with the walls, roof, things like that, it would have to be covered by the Vendor.
Richard: Yeah. So, you hinted a little bit about education, and getting up to speed. It’s quite a simple concept to, get your head around, once you do. It’s quite flexible as we have talked about. But, there is also a degree of complexity, you talked about having to get solicitors involved, various permissions, this sort of thing. I was just kind of driving at, what sort of resources did you find helpful and could you direct other people to, to start that process off of getting an understanding of Lease Purchase Options?
Tom: Definitely, yeah. So, again like is said, I learned from a few mentors, early on. Along that time as well, I also read a lot, and various things like that. So, Rick Otton, I’m sure people will probably have heard of Rick Otton, he is very big in Australia. He is the person who started really, Purchase Options, Lease Options, on properties. He has got a few great books, you get on things like Audible, a lot of audio books on there, things like that. I read book which was very good as well by a guy called Barry Davies, he is based down in Bristol, got a book called Escape the Rat Race. Again, that’s a very good book, you can learn things. And various different educational programmes as well, who sort of cover these options. I know Property Investors Network, they do a few things on Purchase Lease Options as well. So, very different resources like that where you can properly educate yourself to understand all these sorts of things.
Richard: Fantastic. Some good pointers there as well. What I will do is, I will put the links to those books you have mentioned in the show notes, so people can find them there. I think, you know, to be honest with you, this is the second time we have spoken in this way. I really enjoyed the conversation, I’m pretty convinced there is going to be a lot of listeners who are interested, because you know, you have actually been doing it. You are not on the circuit, selling things, I know this is the first time you have done anything like this. Is there a way that people could potentially reach out and get in contact with you?
Tom: Yeah, of course, if anyone has got any questions, or would like to know how to do these sort of things, or would be interested in coming to have a look; my email address is tom.appleton01@gmail.com I am more than happy to help anyone out, or any questions people might have. Actually, it is a bit more of a complicated strategy so, initially anyway. so, if I can help anyone out, that would be great.
Richard: That’s very generous of you, Tom. Thanks for that. I guess, probably just before we wrap up properly, is there anything I should have asked you that I haven’t?
Tom: No, we have pretty much covered everything, as I said, it is more of a creative strategy, you can tailor make it to the strategy you are doing. So, if someone is doing Single Lets, at the moment and like that strategy, and they might be coming across Vendors where they are in a bit of negative equity or they have got no mortgage on the property but they don’t want to sell it below market value, it’s another tool in the toolbox if you like. I have done all sorts of different property deals, I have done Joint Ventures, I have done Lease Options, Exchange and Delay on Completion, I have purchased my own, and I think sort of, having that in your toolbox. If you come across a Vendor where…B&B isn’t going to work, and they are wanting the market value of it today, something like a Lease Option would really help them. I have found it to be one of the best sort of solutions really, it works good for all parties.
Richard: And, just to clarify, what we are talking about here, quite clearly, is that you are doing this yourself. You are finding the opportunities, you are talking to the Vendors, then you are packaging up the deals for your own personal benefit. Probably what I did mean to ask you is that there is another…that investors could get them directly through some sort of introducer, or agent, or source. I guess, similar rules apply but somebody else is doing the legwork…but I guess, from the investor point of view, who is maybe acquiring a deal like that, they have to spend a bit more time and attention on the due diligence, make sure it all stacks up, would that be fair?
Tom: Yeah, definitely. I have sold a few properties on, Purchase Lease Options, things that weren’t quite what I was looking for, quite my strategy. So, there are people out there that are doing them and they are doing the right due diligence and that sort of stuff. If someone does present a Purchase Lease Option, make sure you are doing your due diligence on it yourself as well. Make sure you are looking at everything, rental income, the market value of the property. All that sort of stuff. Do your own due diligence on it as well.
Richard: Wise words, actually Tom, very wise words. I was recommending people do their own due diligence and not just believing what other people are telling them. Which I am sure people are saying the right thing, but trusting your own knowledge and your own fact find is what I say. So, it’s probably a good way to draw a line on it. I really appreciated talking to you, both times, it’s been great. Hopefully, we will carry on the conversation. But I am going to put the links to the books in the show notes and I’m going to put a link to your email in the show notes. Thanks very much for sharing, that’s very kind of you. Really appreciate your time today and it’s good to talk to somebody who is pretty down to earth, who is actually doing it. Making the strategy work, on the ground as it were. It’s been a pleasure to talk to you Tom, I really appreciate your time, information and experience.
Tom: Thanks a lot, Richard. I will speak to you soon.
Richard: You too, you take care. Thanks a lot.
Property Chatter
Interview with Subject Matter Expert: Tom Appleton.
Resources mentioned:
Book reference: Escape The Rate Race – Barry Davies
Contact Tom: tom.appleton01@gmail.com
Lease options at first glance are a property investor’s dream. Imagine being able to control a property to derive an income from it with an option, not an obligation, to buy the property years into the future for a pre-set value…often for just a £1 down-payment.
It is true, this can certainly be done and indeed is being done as Tom so clearly demonstrates to us.
However, Tom also stressed the importance of getting educated and specifically when it comes to an advance strategy such as lease options. On the surface the concept is quite simple to grasp, however, there are a number of things that could potentially cause our dream to turn into a bit of a nightmare.
Firstly, speaking to property owners and agents…do they understand what a lease option is? Possibly not unless the right language is used to help them get their heads around it. Use the wrong language and it could blow the opportunity simply by being confusing or making it seem just too difficult.
Then legally, there are several aspects to be careful with. Tom also stressed the importance of both sides being legally represented and having a watertight agreement drawn up by solicitors. The last thing we need is to get 5-7 years down the line and find that our option is unenforceable. Similarly, make sure the responsibilities of each party are clearly laid out in the agreement, including maintenance, repairs, furnishing, decoration and any structural issues.
Similarly, as ownership stays with the property owner until the option agreement is exercised and the title is transferred, should the owner fall into financial distress or mortgage arrears then that property could be called upon by various parties to settle off any debts.
Permissions and compliance is another area to consider, especially lender permissions, insurance and licensing. Make sure the property is capable to be used in the way you want to use it and that the relevant bodies and authorities have consented to that.
Lease options are something of an advanced and also a creative property strategy, but as can be seen, done correctly, they can offer a great way to ‘finance’ our property investment by using the equity or existing finance of the property owner with this type of arrangement.
I did agree to proceed on a couple of lease option deals myself at the turn of the year, so it is an area that interests me as well as part of a balanced portfolio. The idea of having a few properties that are producing a short-term income with a deferral of the payment of the purchase price is certainly very appealing. However, always do your own full due diligence as if you are buying the property…and a bit more on top too! By their nature, these types of option agreement are more complex and also tend to attract people and properties with some underlying issue. Our job is to understand that issue and then ensure we are protected against it.
I know that I have been a little cautious in my wrap-up, it’s just that the sizzle of a lease option can appear irresistible to some and so I just want to make sure the right balance is brought into the conversation.
However, as you could probably tell, Tom certainly seems like a down-to-earth sort of chap, who likes to do things the right way. So, why not reach out to him and ask him more about his experience if you are interested in this type of creative property finance proposition.
OK, so another week of financing alternatives is under our belt and we are not done yet either! Next week, I shall look at lease options again, as I speak to a specialist in lease options that acts as a deal sourcer finding deals for investors.
As always, email me personally if you want to talk about anything from today’s show or more generally in property investing to podcast@thepropertyvoice.net, the show notes will be over at the website www.thepropertyvoice.net
Other than that, I would just like to say thank you very much for listening once again this week and until next time on The Property Voice Podcast…it’s ciao-ciao.