Property Strategies (Part 5)
This week we are going crank it up a notch and take a look at how to be more creative in our investing. For example, using “options”, delayed completion and other innovative ways of structuring deals.
Now, whilst some people ONLY follow creative strategies such as options, I prefer to dip in and out when I come across an opportunity that is potentially exciting. Does this happen often? Yes – and opportunities will present themselves to you too. When you’ve been in property for long enough and when you talk to enough people, you’ll find that opportunities will crop up which will allow you to structure a deal in a much more creative way.
Why would you want to do this? Well, aside from making property investing far more exciting, there are other ways to gain “control” without necessarily actually buying a property.
One thing I think many fail to appreciate until they actually start looking into this is the amount of power that you can get from something simple like, for example, an option. What’s more, this can sometimes be as good as (or perhaps in some ways, even better than) going out and actually buying a property. Let’s think about options to see “why”.
An option gives you the right to buy a property but doesn’t make you obligated to buy the property. However, it does obligate the vendor to sell you the property should you wish to buy it.
As such, if you have an option to buy a property, you have the right to buy but are not obliged to do so, whereas the vendor who has signed the agreement has no choice but to sell you the property if you do want to buy it. So, who’s got the control? Clearly, the person who has the option.
One of the great things about options is that you can agree to buy a property at some point in the future having agreed a price today, and this gives you total certainty as to what you’ll be paying. Depending on market conditions, the price you agree could be today’s market value or even less than today’s market value – and this will be the price that you pay even if it’s in 5 or 10 years’ time.
Should you wish to, you could also agree to pay a price that’s slightly higher than market value. Why would you want to do this? Well, because you can take control of the property now without outlaying very much money at all, and can hope that the market will pick up over the next few years. If the market picks up, then although you may have agreed a price that is higher than the current market value, when you actually buy the property it might be low in comparison to 3, 5 or 10 years’ time. What’s more, because you have control of the property, you could also let it out if you have the vendor’s consent.
What you’ll do will depend on what you agree with the vendor but, if the vendor is agreeable, then you could even structure your option agreement so that you could, for example, convert a property from a single-family home to an HMO. (Assuming of course, that it would work in terms of building regulations and planning, etc.).
Is this really possible? Yes! You could find yourself a property and – with the vendor’s express consent – spend whatever it takes to turn it into an HMO without having to actually buy it.
Personally, I have never done this but I do have a few properties on options which I use as buy to lets. One of the great things about these properties is that they look and act like a buy to let, but I have never had to apply for buy to let finance. What’s more, they cash flow and all of the future capital growth in these properties is mine – even though I haven’t actually bought them yet. And, even when the capital growth is apparent, I’ll still be buying at the price that I agreed when the option agreement was signed.
So, as you can see there is a vast amount of power and control in this type of deal.
Another creative strategy that also has this lure is Rent to Rent – and this something that could be tied in to an option deal. For example, if you approach a stereotypically tired landlord and express an interest in renting their property from them for the next five years, then you might also suggest that if it all works out, maybe you could agree to buy the property in five years’ time. It’s always worth asking because the worst that can happen is that they say, “No”.
Another related strategy could be Delayed Completions. This works very similar to an option, with the big difference being that you sign a contract to state that you are definitely going to buy the property. So, with an option you’re not obligated to buy the property, but with a signed agreement for a delayed completion you are obligated to buy. But again though, you could defer the buying of the property for years down the line if the vendor is in agreement. “Assisted Sales” could also fit into this neatly too.
So, as you can see, even if this is not your primary strategy, there are many different things that you can do if you’re creative and give it some thought. What’s more, you can gain power and control without actually buying a property – you just have to be innovative in your approach and creative in your thinking.
Here’s to successful property investing.
Peter Jones B.Sc FRICS
Chartered Surveyor, author and property investor
By the way, I’ve rewritten and updated my best-selling e-book, The Successful Property Investor’s Strategy Workshop, which is an account of how I put together my multi-property portfolio, starting from scratch and with no money of my own, and how you can do the same. For more details please go to: www.ThePropertyTeacher.co.uk/the-successful-property-investors-strategy-workshop