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This report describes how you can sell 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 offer your home for sale on a “rent to buy” basis, you’re simply saying to the market:
“I’ll let you buy my home, but instead of giving me all the money now, you can start off by renting my home, and then buy it further down the track.”
The “further down the track” period can be whatever period you negotiate with the buyer. Typically it’s a period of 1-3 years, but could be longer if it suits both parties.
Is this a legal way to sell a house?
Yes – absolutely!
It’s becoming increasingly popular to sell 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 the buyer 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 the buyer will enter into to rent the property during the period before he actually purchases the house. During this time he 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.
Do I need a Real Estate Agent to sell my property in this manner?
No – you don’t need the services of a real estate agent to sell your property on a rent to buy basis.
Do I get any deposit from the Buyer?
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 they pay, the better obviously. 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 from the buyer. 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.
What happens to this deposit money?
This money is paid directly to the seller, and is not held in a trust fund.
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 buyer. You would want to try and cover your holding costs of the property during the rental period. So you would calculate your holding costs (mortgage repayments, insurance, rates, maintenance etc) and work out a weekly figure that you would be comfortable with.
This figure would be the minimum weekly rental that you would look to charge. Sometimes you can negotiate a higher weekly rent than this, and thus generate positive cash flow. It all depends on what your holding costs are, what the market rent is in your area, and what the buyer can afford. However, generally you will find that buyers who enter a rent to buy arrangement are more likely to pay higher rent to get the opportunity to purchase their own home.
It’s also common to offer the buyer a credit for a percentage of the rent they pay, against the purchase price of the house. For example, you may agree that 10% of the amount they pay in rent will be credited toward the purchase price of the house, if they follow through and exercise their option to buy the house. If they don’t end up buying the house then they forfeit any credits.
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 worst case scenario for the seller is that they get the house back. They can then decide if they want to do another rent to buy Agreement with the same buyer, or look to find another buyer for the house. Or the seller may decide not to sell at the moment, move back in themselves, or just rent it for the time being.
Note: At all times the seller retains 100% ownership and title to the house, until there is a settlement sale with the buyer.
Why would I sell my house on a Rent to Buy?
Selling your house on a rent to buy arrangement doesn’t suit everyone. It will only work if you are prepared to be flexible on the timeframe when you receive all the money for the sale of the house.
There are various reasons why a seller might offer this time flexibility. Some reasons might be:
• You’ve tried selling your house the traditional way, but it won’t sell
• You get the price you want
• You get the rent you want to cover your holding costs while you wait for settlement
• You sell your house faster
• You get many more interested buyers than you would from a traditional sales process. More buyers mean a higher sales price.
• You don’t have to deal with a real estate agent
• You can get on with other things in your life, knowing that your house is pending sale. A couple we know who recently sold using this method went off touring Australia in a caravan for a year, using the deposit money to help them on their way. They expect the buyer to settle within 12 months, before they return.
• If you are in mortgage stress, this may offer a solution to a situation that might otherwise spiral out of control. Of course you need to vacate the house to rent it, but you get mortgage relief fast, prevent foreclosure, preserve your credit rating, and potentially get a good sale price.
This method works for investment properties as well
Selling your house on a rent to buy arrangement works for investors as well as owner occupiers. As well as the above mentioned reasons for selling, some additional reasons this strategy can suit investors are:
• Your investment property is vacant and you can’t get it rented out
• You can turn a negatively geared investment property into a positively geared one
• You’re fed up with renting your property and want to get it sold fast
• You have a tenant in your property that might want to buy it using this method
• You can have a buyer lined up for your property as soon as the current rental lease expires
Are you interested and would like to know more?
Are you interested in exploring this method of selling your property?
Do you have other questions?
We have experience in helping sellers use this approach to get their properties sold quickly. We’re happy to discuss any questions you might have about your own property.
Just contact us via our contact form and give us a brief outline of your situation.
If you want, we can arrange a time to chat on the phone. We might even want to buy your property ourselves on a rent to buy arrangement! We sometimes do this with sellers. Alternatively we can work with you to help get it sold.
Thanks for your time
Hugh Pate
Fast Action Property