Introduction to Lease Options

 

Options, lease options, sandwich options and management agreements.  You may have heard about these from a friend, a collegue or even me!  It is the answer to all your dreams…..well kind of anyway.  If used properly you can make money.  A lot of it.  Especially if we see a boom in prices over the next 5 years or so.

 

So first I must define what these things are before I go on about how great they are.  You will soon see what I am talking about.  Iam going to start with options (as opposed to lease option and sandwich options) as this is the most simplest and an excellent place to start.

 

Options

 

An option is exactly that.  It is a legal document that gives you the option to buy a property at a set price within a set period of time.  That’s it.  Let me show you an examples.

 

Address	Option
5 London Road	You can buy this property for £250,000 if you complete by 1st January 2011.
12 Acacia Avenue	You can buy this property for £200,000 if you complete by12th December 2015.
4 Jones St	You can buy this property for £55,000 if you complete by the 30th June 2020.

 

These are all examples of options.  It is a legal agreement between you and the owner of the property.  It specifies:

 

1. the price you have agreed called the exercise price
2. the period which can be a date or a period amount of time from the date of signing.

 

Please note you never have to buy the property.  It only gives you the right to buy (but not the obligation) this property within the time period.

 

So if someone goes on about options to you there should be TWO key parts to the option:

 

The PRICE and

The PERIOD

 

Think of these as the 2Ps of options or think of a 2 pence coin as soon as the word option is mentioned.

 

The 2Ps are everything when it comes to options.  If the Price is good and the Period is good then you have a very valuable option.  If the Price is bad and the Period is bad then you have a worthless option. 

 

So what is a good price, bad price, good period and bad period?  Well you have to look at the both together as they are correlated to determine whether you have a valuable option.

 

I want you to have a think about what a valuable option would look like.  I am hoping my explanations above will give you a clue to the answers as it seems obvious to me. It might explain why you can “buy a house for a £1”!!!!

 

In the next blog entry I will tell you how to place a value on options.

 

Ajay

Posted on: 17th Sep 2009