28 | LEASE/OPTION CONTRACTS WORDS | John Howell. New leases of life
New fi nancial models to wake up tired markets should interest to the whole international property industry. Will they work? Are they legal? How could I use them? When the new model is put forward by someone who has spent many years working in the UK fi nancial services industry it deserves even more attention. Perry Stewart tells OPP about his Lease/Option contracts and how he’s bringing them to market.
he basic concept of Lease/ Option contracts is simple, though it can be varied quite substantially to suit the needs of individual buyers and sellers. It rests upon the fact that there are many people who are desperate to sell their property before the bank forecloses on it and there are many banks who would much prefer to keep a loan being paid so that it does not appear as a bad debt, so damaging their balance sheet and making compliance with the new Basel III requirements even more diffi cult.
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In these cases it can suit both the bank and the owner of the property to agree to the sale of the property for less than owed to the bank and, if the buyer meets their fi nancial requirements, for the bank to loan all or part of the
What is Basel III?
Basel III is the latest of the Basel Ac- cords that govern banking around the world. It was developed in 2010-11
as a result of the huge problems discovered in the banking system in the crash of 2007-8. The new rules, in particular,
greatly increase the amount of equity and Tier I capital required by banks and take other steps to improve bank liquidity and reduce bank leverage. Writing off bad debts reduces the
bank’s capital and so makes compli- ance with Basil III even more diffi cult. The minimum capital requirements are increased from 2013. It is likely that many banks, partic-
ularly in Spain, have under-disclosed the true level of their property loans that are, in eff ect if not technically, bad or derelict loans. In this case the full disclosure
of these loans would make the banks capital position diffi cult or impossible.
purchase price to the buyer. A number of companies are offering solutions on this basis.
But what happens if the proposed buyer does not meet the very tough fi nancial requirements that the banks impose today? Well, in some cases the Lease/ Option contract can help. These cases could amount to thousands of sales: hence the interest in this plan.
“Over 40 people have so far gone ahead with buys on this basis in the UK and Spain”
Imagine a house with a value (a true value, independently appraised) of €200,000 but where the owner cannot afford to repay his mortgage and the bank is threatening to repossess. Imagine that the mortgage is €160,000. The owner knows that, if the bank repossesses, the property will be sold for very little – almost certainly far less than the amount due to the bank. He then faces the threat of being pursued at home for the rest of the loan and, even if that doesn’t happen, he will lose his equity in the house.
Then imagine a potential buyer who is a serious and responsible person but who cannot satisfy a bank that he is a suitable person to be given a mortgage in today’s climate.
Perhaps he has just started a new business and does not have a track record of audited accounts. Perhaps he has just divorced and so has a smaller family income and yet desperately needs a place to live. Perhaps he is working in the ‘black economy’. In each of these cases he might be prepared to sign a contract under which he would have the right (but not the obligation) to buy a property in (say) three or fi ve years time and, in the meantime, to rent the property from its current owner for enough money to continue the payments on the current owner’s mortgage.
Next. imagine a bank prepared to agree to this and even (where
Buying when broke | Lease/Option contracts could help fi nance potential buyers
necessary) to reduce the current owner’s mortgage debt (and so the mortgage payments) to make this possible. They might do this because this is far cheaper for them than repossessing the property and it leaves this mortgage as a ‘good’ loan which will not cause damage to their balance sheet.
Immediate Property Solutions uses its skill and experience to put together a deal between the bank, the buyer and the seller.
Under this deal the buyer is probably paying a little more rent than he would pay for a similar property in the same market but part of that extra rent is going towards the price of the house, as and when he buys it.
At the end of the three or fi ve year option period, the buyer can buy the property for the price that was agreed. Part of the price will be paid out of the rental payments that he has been making and the rest, possibly, by a loan from the bank to whom he has now proved his ability to pay by meeting the mortgage payments for several years.
You can contact Perry Stewart at
pstewart@ipsproperties.com or by telephone for more information on +44 845 257 9667
It may even be that, by this time, the house has increased in value and we are in much better economic times. This would be a bonus but is not essential to the working of this product. Of course, no deal of this kind can ever be problem free. The seller doesn’t get his money for a number of years. The bank is allowing a tenant into the property. The buyer runs the risk of the seller not being able to honour his contract. IPS seem to have thought of solutions to most of these problems and all of the parties might agree that the overall deal is worthwhile. We understand that over 40 people (and their lawyers) have, so far, gone ahead with Lease/option purchases in the UK and Spain and that IPS is now ramping up the operation and looking to take it into new markets.
BUSINESS
www.opp.org.uk | JUNE 2012
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