So called ‘Consultants’ are charging thousands to teach people how to use these schemes which should, in the opinion of Mark Alexander, Managing Director of The Money Centre, be rated as extremely high risk.
The scheme involves an investor entering into an option agreement with a person who is struggling to sell their home. A value is agreed and the investor secures an option to purchase at a fixed price for a fixed term in return for what can only be described as a promise to pay the mortgage which remains in the vendors name.
The investor then finds a tenant who pays a premium to the investor for an option to purchase the property on similar terms (increased values) to that which the current owner has agreed with the investor. Theoretically the investor makes money in two ways.
When the person with the option to purchase exercises the option to buy the investor simultaneously exercises his option and the investor profits on the difference between the values of the option contracts he has negotiated. Second, the investor charges rent over and above the cost of the mortgage. The investor also benefits from any up front premium taken out of the deal without ever taking ownership of the property.
The potential risks are:
- For the person who wanted to sell, if the investor fails to pay the mortgage it will not be the investor who gets repossessed, it will be the owner. This could result in dire financial problems which could lead to bankruptcy.
- Second, the person who paid the premium to the investor for his lease option only has the financial covenant of the investor to rely upon as security for the money he has paid.
The following points need to be seriously considered:
- How many investors using this scheme have an undoubted credit rating? Who is checking this?
- If the tenant doesn't pay the rent, will the investor have sufficient funds to pay the mortgage that he has promised to pay?
- What happens when interest rates go up?
- Who is responsible for the upkeep of the property and what happens if they can't afford to maintain it properly?
- Is any third party with an undoubted credit rating going to underwrite these risks?
If a broker recommends this scheme and the investor and/or the tenant and/or the vendor lose out financially, who will they turn to for compensation? Might it be the FSA regulated broker who recommended the scheme and his PI insurance?
