Diary of a UK Property Investor – The great Lease Option miss-selling scam!

I have been speaking to many investors about Lease Options and I firmly believe they are a disaster waiting to happen.

What are lease options?  Simply put, instead of investors actually buying a property, with lease options they take control [an option to buy] over it and lease/rent the property out.  A vendor would move out of the property to their new home and the investor would pay the mortgage and collect rent from either a tenant or a 1st time buyer who wants to rent and eventually buy the property.  A 1st time buyer may pay the investor a fee and extra rent in order to get this opportunity to buy this property in future – maybe at a discount.

Investors use this strategy to obtain profits from the rent and also a potential future sale of the property.  They also avoid the costs/risk/necessity of buying the property themselves. 
Vendors accept the lease option usually because they have no other solution to move on and because they are told they will eventually get the price they want for their property. 

Sounds great?  In theory it is BUT in practice something often goes wrong! 

For example;

• An investor tight on cash flow [which seems to be everyone interested in LO's] takes over a mortgage so they can make a few quid on the rent and by selling a LO to a 1st time buyer.
• The vendor moves out and takes out another mortgage on their new property.
• Several months down the line, the 1st time buyer runs into trouble paying their rent.
• Not only that, but the cash-poor investor also runs into trouble with his other properties because he isn’t getting rent on them and because rates are increasing. Triple-whammy!
• So the investor keeps the whatever rent he is getting on the LO to prop up his own portfolio/debts and the mortgage doesn’t get paid on the LO property (after all, they have no legal responsibility or financial motivation to pay the vendors mortgage ahead of their own!)
• The vendor of this property cannot afford to pay this mortgage as well as their new one and so risks losing both homes and may definitely lose one if the mess isn’t sorted out in time!
• OR all goes well but the vendor decides not to sell the property [LO's are a waste of paper legally - you cannot force someone to sell a property even if they have exchanged] and the investor has spent all the extra rent and fees they pocketed from the 1st time buyer propping up their cash flow and so the 1st time buyer who now cannot buy is now owed £1000’s by the investor who has no money!!

At least with SARB the vendor only risked losing one home but now they risk losing 2, and investors are now also risking the 1st time buyer’s money and not just theirs!  Truly nightmarish stuff!

The risks with these deals will run into a high percentage and most investors will not have cash buffers to cover the loss-making eventualities.  This being the case, many vendors will be hurt by this in future.

I am sending out this newsletter as too many investors and too many courses are touting the benefits of this without explaining ANY of the pitfalls.  The strategy is not sustainable and it is not the investor who is at risk.  Don’t gamble with other people’s money!   BUYERS BEWARE!

Investors should focus on sustainable property investment strategies: buying, selling, letting, trading and investing in ‘bricks and mortar’ and in a sustainable way;  i.e.  ONLY invest in what you understand and in amounts YOU can afford to lose!

Source: David Coughlin – HBF Investments

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