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This report describes how you can buy your house using a strategy that is becoming more and more popular. It’s known as “rent to buy” or “rent to own”. Sometimes it’s also called a “lease option”. They all mean the same thing, and operate in same way. For our purposes we’ll just call it a “rent to buy” strategy.
What is a Rent to Buy house?
If you buy your home on a “rent to buy” basis, you’re simply saying to the seller:
“I’ll buy your home, but instead of giving you all the money now, I’ll start off by renting the home, and then buy it further down the track.”
The “further down the track” period can be whatever period you agree with the seller. Typically it’s a period of 1-3 years, but could be longer if it suits both parties.
What type of Buyer is suited to a Rent to Buy arrangement?
This type of arrangement is suited to a buyer who cannot get a loan to buy a house, but who can afford the mortgage repayments on a loan.
There are many reasons why a buyer may not be able to get a loan, but the most common are lack of sufficient deposit funds, stamp duty costs, imperfect credit file, self employed, new immigrant. Many people can afford home loan repayments, but just lack the “entry” funds to get into home ownership.
A rent to buy style arrangement may be just what these buyers are looking for.
Is this a legal way to buy a house?
Yes – absolutely!
It’s becoming increasingly popular to buy a house using this type of arrangement. It’s all done using legally binding documents with the involvement of solicitors.
What legal documents are used in a Rent to Buy arrangement?
There are 2 documents that comprise a Rent to Buy agreement:
1. A Residential Tenancy Lease
2. An option for you to purchase the home at an agreed price by an agreed date
The Residential Tenancy Lease is a normal Lease Agreement used in everyday rental lease agreements. This is the document that you will use to rent the property during the period before you actually purchase the house. During this time you will rent the house as a normal tenant.
The second document (called an Option agreement) gives the buyer the right to buy the house at an agreed price, by an agreed date. As mentioned before, this is typically within 1-3 years, but is negotiated by both parties. The Option agreement is attached to a standard Contract of Sale.
Note: The buyer would normally be expected to pay the legal costs of the seller in having the rent to buy contract document drawn up. Typically this would be in the range $(1200-1500).
Do I need a Real Estate Agent to buy a home in this manner?
No – you don’t need the services of a real estate agent to buy a home on a rent to buy basis. However, the seller might want to use the services of a Real Estate Agent to manage things during the rental period of the arrangement.
Do I need to pay any deposit?
Yes – the buyer pays some upfront or deposit money to the seller as part of the arrangement. This is whatever the buyer can afford to pay. The more deposit the buyer can pay, the more attractive it will be for the seller to sell his house to you.. There are no hard and fast rules regarding the deposit amount. As a general guide though, you might expect somewhere in the range of 2-5% deposit money. Each case is different, and it’s up to the seller and buyer to agree what they are both happy with.
This deposit is actually part of the “option fee” that the buyer pays for the right to buy the house further down the track.
Can I use the First Home Owners Grant (FHOG) as a deposit?
No – the FHOG cannot be used as a deposit for a rent to buy property. It can however, be used at final settlement (at the end of the rental period) when the buyer commits to buy the home, when the final sale process occurs.
What happens to this deposit money?
This money is paid directly to the seller.
If the buyer purchases the house within the agreed timeframe then this deposit is credited to the purchase price at settlement.
If the buyer decides not to proceed and buy the house within the agreed time period, then the buyer forfeits this deposit money.
How much rent does the Buyer pay during the rental period?
This depends on what you negotiate with the seller. Normally the seller would want to charge enough to cover his holding costs for the property (so that he’s not out of pocket during the rental period).
It’s normal to pay a higher weekly rent than market rent to get into a rent to buy property. View it as being given the opportunity to own your own home – that you otherwise may not get. The price for getting this opportunity is paying a higher than normal market rent.
An an offset, it’s also common for the buyer to get a credit for a percentage of the rent they pay, against the purchase price of the house. For example, the seller may agree that 10% of the amount you pay in rent will be credited toward the purchase price of the house, if you follow through and exercise the option to buy the house. However, note that if you don’t end up buying the house, then you will forfeit any credits you have paid.
What if the Buyer decides not to purchase the house by the agreed date?
If the buyer decides not to exercise their option to purchase the house by the agreed date, then the following happens:
• The rent to buy Agreement is terminated
• The buyer forfeits any deposit monies they have paid to date
• The buyer forfeits any “rent credits” they have paid to date
• If the seller wants to, they can negotiate a new rent to buy Agreement with the buyer. This can include a new sales price, option fee and option period.
• The seller may require the buyer vacate the property, unless a new rental or rent to buy agreement is made
Note: At all times the seller retains 100% ownership and title to the house, until there is a settlement sale with the buyer.
What a Seller looks for in a Buyer
What does a seller look for in a buyer when selling his house on a rent to buy arrangement? A seller will consider the following:
• Is the buyer serious about owning their own home?
• The rental history of the buyer. A good rental history is required.
• How much deposit can the buyer pay?
• The income base of the buyer. The buyer will need to demonstrate they can afford the rental repayments without undue hardship.
• The credit history of the buyer. The seller will normally be more tolerant than a bank about credit defaults, but he will want to know about any defaults and what is being done to correct them.
• Will the buyer follow through and buy the home at the end of the rental period?
• Will the buyer be able to find the funds to buy the home at the end of the rental period?
The seller will advise the buyer what information he needs to provide to apply for the rent to buy property. This involves personal, employment and credit history information. The seller will evaluate this information and discuss it directly with the buyer. The seller normally charges an Application Fee, which can be in the range $(750-950).
If the buyer is unsuccessful with the application, then a percentage of this application fee is refunded to the buyer (usually up to 90% in most cases). If the buyer is successful with the application, then the application fee is credited toward the seller’s legal cost of having the rent to buy sales contract drawn up. Note that the buyer will normally have to pay the seller’s legal cost of having the rent to buy contract drawn up.
Are you interested in Rent to Buy?
Are you interested in this method of buying a home?
If so, you can register yourself with us as a potential buyer.
Just use our contact form to send us your contact details and what type/location of property you’d be interested in.
Any other information you want to add would be welcome, such as your target purchase price, what you could afford in deposit, weekly payments, and what rental period you’d be looking at before you could settle etc.
If we have any sellers that match your requirements we can then contact you.
Thanks
Hugh Pate
Fast Action Property