Warning on property schemes

First-time buyers are being warned that unregulated schemes that offer the chance to rent a property with an option to buy it are a “disaster waiting to happen”.

Property investment clubs are marketing “property lease option” schemes to buy-to-let investors as the new way to make money out of property with less than full financial commitment, after finance for other ‘no money down’ schemes such as same-day remortgaging dried up.

A lease option contract gives the tenant the right, but not the obligation, to buy a property at a set price at an agreed future date.

Tenants pay an upfront deposit of around 2-3 per cent of the property price, which is put towards any future purchase. Tenants then pay monthly rent as well as monthly payments towards the purchase of the property.

With more first-time buyers struggling to raise a large enough deposit or unable to meet the strict lending criteria of lenders, the schemes are being increasingly marketed by landlords and property companies as a way to get on to the property ladder without having a deposit or a mortgage.

For tenants, a lease option offers the benefit of being able to fix the price of the house from the outset, providing some insurance if property prices rise further.

However, property experts warn that these schemes have a number of pitfalls, with the majority of the risk stacked on the side of the tenant. David Lawrenson of Letting focus.com, a private rented sector consultant, believes lease options are a “disaster waiting to happen”.

“The danger is that the tenant turned possible buyer has no real security at all over the property,” he said.

The lease option is only valuable if house prices rise – while the initial deposit and the monthly payments are non-refundable.

Tenants who miss or fall behind on their monthly payments will breach their lease option contract. If arrears are not recovered then the landlord or the lease option company have the right to evict the tenant and forfeit the contract.

Get-rich-quick gurus are also suggesting that buy-to-let investors combine a number of property lease option schemes into “sandwich lease options”.

Under the sandwich schemes, investors buy properties with a lease option from a distressed seller then find a tenant
to purchase the same property with a lease option on similar terms but at a higher value.

When the tenant exercises his option to buy, the investor will also exercise his option and profits on the difference between the values of the option contracts.

Mortgage brokers said first-time buyers considering these schemes should take independent legal advice and look at other options available in the market.

David Hollingworth of London & Country, the mortgage brokers, said first-time buyers could consider the government’s Rent to HomeBuy scheme, which gives first-time buyers with a household income of up to £60,000 the option to rent a new-build property at 80 per cent of the market rate for a period of two to three years.

The tenant then has the option to buy 25 per cent or more of the property’s market value and pay a subsidised rent on the remaining share.