Welcome to Finance and Fury, the Say What Wednesday edition

 

Hi Louis, My wife and I a looking for ways to buy a home, given some credit history and income stability challenges.

I was hoping to get your thoughts on Rent-to-own arrangements. I really enjoy your podcasts, thanks for doing it.

 

Thanks Cameron!

 

What you need to know about rent-to-own home schemes

  1. Rose out of current market conditions – A perfect storm of rising living costs, “low and slow” wage growth and increasing house prices –
    1. task of saving for a deposit for a $800k place takes longer than $200k place
  2. alternatives – rent-to-own schemes is becoming a choice for people looking to buy a place

 

What is rent-to-own?

  1. Rent-to-own schemes – leasing agreements that afford renters the right to buy a home at the end of a pre-determined rental period, at a price agreed prior to signing the agreement
    1. Sets in stone the future sale price – means you may potentially buy a home for a cheaper price
      1. can also work against the buyer, if the market experiences a downturn during the rental period
    2. You don’t own any part of the home until you made the final payment
      1. Then still need to apply for a home loan when the time comes to buy the property at the end of the rental agreement 

 

How do rent-to-own schemes work?

  1. Rent-to-own schemes have two components: a standard rental agreement and an option to buy.
    1. Option – if you wish to purchase the property – sign a contract with a vendor that affords the right to buy the property at the end of an agreed rental period – usually runs anywhere from two to five years.
    2. Still normally require a deposit – can be secured by applying for the First Home Owners Grant – or your own funds
  2. During the rental period – pay rent that is usually above the market average – plus ongoing fee for the ‘option’ to buy
    1. Some contracts also require the participant to cover additional outgoings (maintenance, stamp duty and insurance) 
      1. The money paid as the premium for the option is deducted from final sale price

 

The costs of rent-to-own schemes can vary wildly

  1. required to pay well above the market rent, as well as an additional ‘option’ to buy the property at the end of the tenancy agreement – exact amount of rent and the premium for the option vary from house to house
  2. Examples – 3 year rent to own – Contract price of $450,000 – pay a $28,000 deposit, $20,000 from FHOG
    1. $600 rent plus $100 a week for the option to buy the property at the end of the three-year agreement
    2. This would mean you would shell out a $109,200 over the initial three-year period
      1. $8k for deposit, but FHOG was $20k, including premiums total deposit = $43,600
    3. if ‘option’ for reduced sale value in the house (which is not a given) = $406,400 home loan needed
    4. Home with a value of $450,000 would end up costing you $543,6000 ($450,000 plus $93,6000 rent
      1. But would likely be renting elsewhere – but for cheaper – say it is $100 above market = $15.6k total

 

A lot can go wrong –

  1. not on the title – if you’re unable to make a payment, you can lose whatever equity you have built up
    1. missing a single rental payment could result in termination of the contract, leaving you out of pocket and without a home
    2. Sounds pretty similar to one part of the Whitewater scandal
  2. May not be able to buy – what happens if you can’t get a loan?
    1. Lose the money you have spent on premiums/as deposits
  3. you also might end up paying an inflated price for the property if the market drops – or lose the money you have already paid
  4. Any event where you can meet your repayments falls over lending laws – like vendor failing to meet their repayments – then you would lose rights to continue making repayments and property ownership

Can I rent-to-own with bad credit?

  1. Yes – sellers have little risk of you defaulting on payments – can actually benefit them financially
  2. Sellers are far more likely to enter into a rent-to-own agreement with a prospective buyer who has bad credit than a bank is likely to offer them a mortgage based around servicing   
  3. Watch out for this – if you still cant get the loan when the contract expires – bad outcome

 

How the process works –

  1. Step one: Find a property – have to be a pack of a company stock already – may take longer than a traditional house hunt.
  2. Step two: Research the home – look to see if it is worthwhile – building and pest, builder, valuer –
  3. Step three: Research the seller – agreement ties your ability to own the property to the seller’s financial circumstances
    1. ask for documents that prove their financial security
  4. Step four: Seek legal advice – help draft a contract, and make sure that they include a clause that clearly outlines details
  5. Step five: Keep up with your rental payments – budget and stick to it – or be left worse off than before
  6. Step six: Secure a home loan
  7. Step seven: Buy the home

 

Thanks for the question

 

If you want to get in contact, you can do so here

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