FREE tenancy agreement
FREE landlord softwareWe begin a series of articles on how a landlord can secure a buy-to-let property without using any of their own equity.
This can be a high risk strategy, but where a landlord is looking at preserving their capital and building a portfolio quickly it could present part of the solution.
All solutions rely on you as the prospective purchaser being able to identify a property which has or would be valued at considerably more than you can buy it for. In addition you will also need to be in a position to be able to persuade the vendor to be involved in the scheme and sign an option agreement.
STRATEGY 1 - The option agreement
Overview on typical purchase for £70k using a lease option with property being valued at £100k:
* The finance company supplies the buyer with a business development loan for £28,505
*The prospective landlord purchases the buy-to-let property for full market value (£100k) and puts in the £25k deposit.
*Vendor pays third party finance company £30k on completion to redeem the option agreement
and finance company discharges the business development loan.
Mechanism of the finance deal
Landlord negotiates deal. eg £100k OMV for £70k PP (OMV = Open market value, PP = Purchase price)
Landlord gets option agreement signed by Vendor for the discounted amount (£70k in above example)
Buyers contacts mortgage broker and organises a mortgage valuation based on buying at the £100k OMV.
The purchasers solicitors instructed to start sale process, order searches etc. and told purchase price to TBA after result of the valuation.
The vendors solicitors instructed and also told the purchase price is TBA after the valuation. After valuation is done both solicitors are instructed at full market value.
The valuation from the RICS surveyor instructed by the mortgage company hopefully comes in at £100k.
The landlord buyer applies for a Business Development loan from the finance company for £28,505.
The buyer then sends the amount needed for completion immediately to the purchase solicitor by CHAPs transfer so that the sale can happen same day.
The purchase solicitor draws down mortgage funds of £75k and takes the £25k deposit and sends £100k to the vendor's solicitor.
The vendor's solicitor pays £30k to the finance company to buy back the lease option and £70k to the vendor as agreed.
The finance company uses the £30k to clear the £28,505.00 Business development loan and pay their fee for this loan of £1,495.00.
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4 comments:
There are so many flaws in this idea - why is it even published here?
For starters, no mortgage company will lend against a property that has a charge against it (such as a busines development loan).
Next, valuations are based on actual purchase price, not asking price or two years' ago price. In this example the valuation would be 70k. But today, it's likely to be even lower because the market does not want to lend on BTL.
Finally, your solicitor may be prepared to play games with the pricing, but the vendor's will not. Indeed, if you manage to enter into a agreement based on a false price with the vendor and their solicitor, then you may find yourself being dropped by your solicitor.
Regardless, if you can get away with it, then good luck to you!
The vendors solicitor will no go along with it, which is why you find a solicitor for the vendor aswell. Offering to pay the vendors solicitors costs will help this.
The problem is not getting it through but the fact it is mortgage fraud.
If you hide the true purchase price from the mortgage company then you are committing fraud.
When the finance company gets found out for doing this, then ALL their customers will be charged with fraud.
This 'method' is no longer required because it is possible to borrow on valuation now anyway.
I'm no legal expert but I think the way that the purchaser gets around the discrepancy is in the timing.
The original agreement is for a purchase at x price. This has to be agreed by a RICS surveyor.
Using Lease Options this way has been popular with some btl investors, but there are simple ways to use lease options to control property. What if the investor in this example could still have full control of the asset - the property, but didn't need a mortgage at all? You can actually use lease options to do exactly that. When finance comes back to the market, and prices start to rise again, you can then exercise your option. Alternatively you could sell the option for a healthy amount, and accrue cash for deposits to buy in more conventional ways. Lease Options really are powerful tools when used well. The key is to keep things simple.
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