I was browsing a property forum where folks are allowed to sell on their property and Lease option leads.
This is the deal that was supplied, and below that the analysis and my thoughts. The important parts of this deal Ive marked in orange text.
The ‘Deal’
Location: Grantham, NG31 7XJ.
Property Type: 3 Bedroom Modern Terraced House. ( council property – always harder to re-sell)
Tenure: Freehold.
Works Required: Tenant currently refurbishing property with new kitchen, flooring and other things etc.
Buy To Let Mortgage already in place.
Last Rics Valuation: August 2008 £99,000.
Lease Option: 19 Year Lease Option at £105,000 purchase price.
Estimated Market Value: £90,000-£99,000.
Outstanding Mortgage: £84,281. ( roughly 15% of £99k)
Monthly Mortgage: £126. ( this is very low- probably due to current interest rates-normal mortgage cost would be 3-400pm)
Achievable Rent: £400-£450. ( AFTER renovation-requiring further injection of cash)
Positive Cash flow: £274.( again- AFTER renovation- and this is estimated figure)
Income Over 19 Years Period: £62,472.
Deal Fee: £5995. ( this works out to be a massive 6+% of the maximum value of the property when other fees are included)
Reservation Fee: £350 (deductable from finder’s fee).
Buyer pays vendors legals (these should not exceed £600).
OK first lets look at the numbers and location. When doing any kind of due diligence I would look at where it is and what is around it. Checking Google maps I see this property is within a spit of a major road which gets plenty of high speed traffic- the A1. This looks like a council estate too.
According to the figures given above the value is £90-100k. Not true, the value has been massaged upwards or has been based on the original purchase price. The most one ever sold for was £99k at the end of 2008. Average prices now are £60-80K. This investor is trying to offload this property which I would guess they bought at the peak. The outstanding mortgage shows that it was purchase on a 15% deposit BTL.
Prices in the area are static and the viewings to sales ratio is 94%. In other words it’s likely to sell for 6% less than the estate agent valuation. So, even if it were on the market for £99k it would likely sell for around £93K. The highest priced one in very good condition is on the market for £94k. This would, at most, sell for £88k. And that’s being generous.
The areas marked in orange above show you where the danger points are when analysing the deal. And this is a real horror of a deal. There is also one very important thing to note- this option is a 19 year deal! There are way too many things that ca change inside 19 years. Our lawyers advised us that setting up an option for more than 3 years is an absolute no-no. My guess is that 19 years is possibly the term left on the mortgage. Everything falls to pieces here because the initial valuation is unstable.
Some Pitfalls To Watch Out For
If you are an investor considering buying leads from another investor, be VERY careful. Below is a list of potential pitfalls when looking at doing any kind of option deal:
- Lease Options put simply, are a gamble against the future prices.
- Property prices may soar causing the deal to go sour on one party or the other.
- Prices may be stagnant or fall; Tenant Buyers will have spent years on above–market rents for a purchase that now seems over-priced.
- Tenant buyers aren’t able to exercise the option through lack of mortgage funding or personal problems
- You are gambling with interest rates
- They could become regulated at any time possibly making the contracts invalid
- Some people participating as the sellers may be facing financial distress. Their ability to make a rational decision might be impaired. They could attempt to put aside the deal when the dust settles.
Lease option deals can be a minefield of legal problems. Even the current rash of solicitors dealing with them are constantly tweaking the paperwork. So what about the early deals which were cut? Are they still viable? Makes ya wonder eh?? As always, we value your comments, please feel free to add your thoughts below.
