NAVIGATING LEASE OPTION DEALS:
The Bridge between Options and Mortgages.
Lease option deals come with their unique set of challenges and stages, especially when compared to traditional property purchases. This blog post explores the often overlooked intricacies of lease option deals, as well as the potential role of bridging finance in these transactions.Answering the specific question “Do you just use a bridge, when exercising your option?”, asked in our Lease Option Deal Analysis session.
Understanding the Stages of a Lease Option
Lease option deals involve three primary stages, rather than the usual two stages seen in traditional purchases:
- Option period: This initial phase involves securing th option to purchase a property at a predetermined price.
- Exercising the Option: Here, the formal notice is given to convert your option and begin the process of “buying” the property.
- Stage One: At this point, the transaction proceeds to the completion of the purchase, as if you were buying outright from the beginning. Although referred to here as Stage One (entering into the purchase), it is actually the Exit Stage of the Lease Option.
Bridging Finance: A Viable Solution to Mortgage Constraints
A pivotal moment in the lease option process is exercising your option — essentially, transitioning from the option period to initiating the purchase.
This is where bridging finance may come into play!
Traditionally, a mortgage would be used, but it poses unique challenges in lease option scenarios. Mortgage lenders often struggle to grasp the nuances of lease options since this approach doesn’t fit into their usual models. They typically demand proof of deposit and proceed with a loan based only on the agreed-upon purchase price, not accounting for any initial up-front payment for the option or the potential appreciation during the option period.
In contrast, bridging finance providers tend to understand lease options more comprehensively. They may agree to lend based on the “done-up” or current market value rather than solely on the initial option price. This flexibility can be advantageous, especially if the property’s value has increased over the option period.
The Financial Implications
While bridging offers flexibility, it comes with its own set of financial considerations. Borrowers need to plan for both the repayment of the bridge loan and associated interest once the property is refinanced or sold.
A strategic plan is crucial. Some investors, a few months before the option is exercised, explore private funding alternatives to mitigate the often higher costs associated with bridging finance. This forward-thinking approach can save money in the long run.
The Takeaway
Navigating lease options requires understanding each phase’s unique financial landscape and potential hurdles. Bridging finance can offer a solution when traditional mortgages fall short, but it’s important to weigh the benefits against the costs. By preparing in advance and considering alternative funding options, investors can better manage their financial commitments and maximise their investment’s potential.
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FREE Lease Option Deal Analysis Session on Udemy
