‘Rent-To-Buy’ The Latest Trend In Home Ownership

With housing credit continuing to dry up, home vendors and buyers are increasingly entering into so-called ‘rent-to-buy’ arrangements. Done properly, these can yield major advantages for everyone involved, writes DG Institute Founder and CEO Dominique Grubisa.

Spending money on rent is normally a poor financial strategy. Rather than paying off a mortgage on your own house, you’re basically paying off someone else’s property investment. Unless you’re lucky enough to have a home office that allows you to claw back a little tax, every cent you spend on a roof over your head goes down the drain.

But what if your rental payments actually contributed to the purchase of the house you are living in? And, what if you didn’t need a full 20 percent deposit to get into the housing market?

That’s the idea behind rent-to-buy, an approach to buying and selling homes that’s gaining more momentum in Australia, especially as the credit market continues to dry up.

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Rent-to-buy essentially involves vendors and buyers entering into a contract and a lease agreement. The buyer makes rental payments over a period of three to five years and then has an option to purchase the property, with all the payments counting towards the agreed sale price.

The advantages for the buyer include getting a foot in the housing market without having to immediately go through the rigorous bank loan approval process, plus not paying dead rent. For vendors in a soft market, the arrangement can mean a healthy source of income over a number of years leading to an eventual sale.

There’s also great potential for properly licensed entrepreneurs to act as intermediaries, connecting would-be buyers with sellers and collecting a fee for their services.

How do rent-to-buy arrangements work? Buyers typically don’t require the full 20 percent deposit required by banks, but they will have to have some money saved for a deposit – usually between three to seven per cent. Vendors who are first home buyers can opt to use the First Home Owners’ Grant for this.

There are two phases to a rent-to-buy contract – the first is the ‘rent’ phase and the second is the ‘buy’ phase which happens when the buyer has enough equity in the property to qualify for a bank loan, which they then use to cash out the contract and transfer the house into their name.

While the number of vendors aware of and willing to engage in rent-to-buy schemes is relatively small, the figure is growing as the market in most parts of the country continues to soften. Vendors whose properties have been on the market for many months are more likely to be open to the idea of securing a buyer and source of income through this kind of strategy. This presents an opportunity for intermediaries to connect buyers and sellers for a fee. Classified sites like GumTree have advertisements for rent-to-buy deals.

In a traditional property sale, the buyer makes an offer, the seller accepts, they exchange funds and settle final costs. At the end of the deal, the property and its title change hands. In rent-to-buy, the vendor and the buyer agree on a rental price for the home for a set time (usually between three to five years) before exercising an option to purchase the property.

The rent-to-buy contract will specify when and how the purchase price of the home will be determined. In some cases, the buyer and seller agree on a purchase price when the contract is signed – often at or higher than the current market value. It’s a good idea to agree on a price beforehand and lock it in because the housing market is notoriously fickle and if the prices skyrocket as they have in the past few years, you’ll end up losing the equity you thought you had built up in the rental phase.

If all goes well, and the buyer hasn’t defaulted on any payments during the rental phase of the contract, they can then use the equity they have accrued to approach a traditional lending institution for a loan to purchase the property outright.

But, there are also risks. Like any contract, missing one payment, or a late payment, can lead to the whole contract being forfeited and buyers could lose the rent they have already paid as well as the up-front fee. It’s also important to remember that in a rent-to-buy contract buyers don’t have a legal right to the title of the house, but are still responsible for the general maintenance and upkeep of the property, on top of rental payments.

If you do decide to go with this type of scheme it’s best to get the contracts drawn up by a solicitor – preferably one who specialises in property law.