FSA to issue warning over ‘risky’ Lease Options – Part 1

Property investors up and down the UK are offering homeowners a lease option to solve their property problems.
A lease option is basically an agreement between the buyer and the seller whereby the buyer agrees to buy the property at an agreed price (usually the full current market value) at some point in the future with a maximum term of 21 years. The seller is obliged to sell the property at the agreed price at any point during the option period but the buyer is under no obligation to buy. During the term the buyer makes all payments due under any mortgage and/ or secured loan and is responsible for the outgoings and upkeep of the property. The buyer can use the property as if it were their own and can rent the property out or sell the option should they wish to do so. The option is usually backed by a power of attorney in favour of the buyer and a restriction on the property register to prevent any dealings of the property during the option period.
In the UK lease options are being described as ‘the next potential property scandal’ and in a recent article in The Times they were called ‘The mortgage ‘rescue solution’ that could cost you your home’ however, they are successfully and widely used in America and Australia as a way of dealing with property and they have also been widely used in commercial property transactions in the UK, for many years, as a way for builders to secure an option to purchase land subject to obtaining planning consent for example.
The FSA will shortly be publishing a warning on their website advising homeowners what the risks are and what the alternatives are. A spokesperson for the FSA recently commented, ‘The FSA is aware that some homeowners may be considering ‘lease options’ or ‘exchange with delayed completion’ deals as a way to help them reduce the strain on their finances. These products may not always put the homeowner in a better place than if they were to sell their house under normal circumstances, and to that end we will shortly be publishing information on our consumer information website to help explain how they work and what the risks are.’
A recent 5 live radio show advises homeowners against entering into ‘dodgy’ lease options; however, this show focused on one bankrupt investor and one couple who were burnt by this same investor to evidence the risks involved. You can listen to the show entitled ‘Homeowners warned over risky lease deals’ here http://www.bbc.co.uk/podcasts/series/5linvestigates. If lease options are as risky as they are currently being purported to be in the media wouldn’t we be hearing much more about the said homeowners who have allegedly been ripped off?
What are the actual alternatives for homeowners in the current climate? If a homeowner is lucky enough to secure a buyer they could be selling their property at either less than the market value or, worse, less than the mortgage value. Many homeowners cannot afford to move as they are in negative equity. An alternative could be for the homeowner to rent the property out themselves but some people simply do not want the hassle or the expensive of having to do this.
Are lease options really a money making scam taking advantage of vulnerable people in severe financial difficulty or a legitimate alternative to repossession and a way to enable us to ‘transfer’ property in the short term whilst we ride out the storm of the current economic climate.
Surely, lease options are an ‘option’ in this market and provided that the homeowner has been given independent legal advice there should be no reason why homeowners cannot be given the choice to enter into this type of agreement if they consider, given all the information, that is suitable for them in their individual circumstances.
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