With a complete new set of property investment strategies being available for the British property investor, the question now arises is which one to use and when? Not so long ago it was just a case of getting another Buy-to-Let mortgage and buying property in your own name. However, in recent times the question has become, "Why get a mortgage when I can simply control property with an option agreement or an instalment contract?" Let's examine when you may choose an instalment contract to purchase over an option agreement.
In respect of pecking order when it comes to security the general rule of thumb is "the greater the level of security the more expensive it is." If you are looking for an iron-clad binding agreement you may wish to purchase outright to get legal title and therefore pay the highest costs, especially with the large deposits being asked for by lenders today.
When it comes to lending you only have to ask yourself, "Who has the higher degree of security, you the legal owner or the bank?" Should you stop paying your mortgage you will discover in a hurry that it's the bank and not you! They have the ultimate control by way of that first charge they put in place over the home you think you own. What the banks do is control property to get the benefits of ongoing monthly cash flow from THEIR asset, namely you!
Now whether you decide to use an instalment contract where you agree to purchase at a later date after exchanging contract of sale, or to have an option to purchase, really depends upon your exit strategy.
For example, if your intention is to quickly refurbish a property and put it back on the open market for resale, you would be less likely to want to incur all the overheads that come with purchase and selling. An option agreement will simply allow you to control the property without mortgage costs or redemption penalties, stamp duty, building surveys, etc. This can be a highly effective way for builders to undertake work without paying all the financing costs up front.
There are other times when the security you are looking for will outweigh the costs you are going to incur. This will be especially the case where 1) your financial commitment is substantial, and, 2) the length of the agreement is expected to last several years. You could find that where the asset you control (but not the legal owner) appreciates greatly in value with the passing of time, it is possible that the owner may wish to contest the agreement at a later date. That is not to say that any claims are guaranteed to succeed, given that they should have received independent legal advice, but it is still possible.
This would present a valid reason for using an instalment contract, as undoing such an agreement would set a precedent to overturn every contract of sale that has ever been written up of the last few hundred years. It's just not going to happen.
Additionally, where you are acquiring an expensive property that is prone to volatile price fluctuations during the peaks and troughs of the market cycles, you may then want keep your position as secure as possible. In such instances paying tens of thousands of pounds to get into that dream home in say, Knightsbridge or Chelsea, will have you sleeping better at night if you are secured with an instalment contract instead.
Because this is all new to the United Kingdom, it is important that you have a solicitor that fully understands how these documents work. Not only that, it is of even more importance that the legal owner also is not represented by a novice solicitor when it comes to this specialised paperwork. You can almost guarantee that their friendly-neighbourhood solicitor that's a friend of the family will never have come across this before and will be totally ignorant to even admit it. That will quickly prompt the standard response, "You can't do that. It's illegal."
You as the purchaser should therefore have an understanding of the pros and cons of each document type, and suggest to your legal representative the business reasons why you prefer one over the other. Your solicitor will see aspects of the transaction that may help you arrive at a better decision. This will help you decide when to use an instalment contract, an option agreement, or perhaps something else again.
What you now have is far more choice than you ever did in the past when the first and almost only course of action was to purchase outright, either with cash in full or by way of a mortgage. As a property investor your level of sophistication will need to be much greater as a booming market was much more forgiving due to any lack of experience. Today's market climate will not be so kind if you don't know what you are doing.
No comments:
Post a Comment