What is a rent-to-buy scheme?
Chanaka was living with his wife and a friend at the time and they saw an advertisement for rent to buy properties in Melbourne’s west, thinking it would be a good way to get into the market. He used a first homeowner’s grant along with an $8,000 deposit before moving into the property, spending a total of $28,000.
Chanaka said he was paying $700 a week in rent, but his friend decided he wanted to get out of the arrangement and buy something on his own. He said the company had told them that after three years they would get him a bank loan, but by then he could no longer afford the repayments. He is now fighting a legal battle to try and get his money back.
A rent-to-buy scheme involves the buyer, who often cannot get a loan from a bank, paying inflated rental prices for a property with the promise of owning it after a certain number of years.
The Consumer Action Law Centre said a rent-to-buy scheme is unfair because it is not regulated in the same way as normal home purchases.
Susan Quinn from the centre said the schemes left people exposed without the same safe guards in the law. “We see big gaps… particularly in consumer law, so you just don’t have the protection under the law that you would with a regular mortgage,” she said. She added that the law varied from state to state and the laws under the National Credit Code, which protected most home buyers, did not cover this type of purchase.
Ms Quinn said people often decided to go down these paths because they had a bad credit history.
“Unfortunately the people who are buying into these schemes can’t get a mortgage and so they’re being offered really unfavourable terms and conditions on these deals,” she said. “Often they’re completely unaffordable from the beginning for the people who are getting involved.”
What is a rent-to-buy scheme?
A rent-to-buy scheme involves a prospective purchaser of real property entering into a long term rental agreement (usually in excess of five years in duration) for the house to be purchased. At the same time, the purchaser executes a second contract by which the vendor grants to the purchaser, for a fee, an option to purchase the property after a specified period of time, for a specified value. Title to the property does not pass with possession and many rent-to-buy arrangements require the prospective purchaser to pay rates and maintenance costs for the property. Rent-to-buy contracts are promoted to non-conforming borrowers.
The truth is that a rent-to-buy scheme is dangerous and may leave you out of pocket and out of a home. They use slick sales messages to vulnerable people, promising that they want to help people get into their first homes. The truth is that victims of a rent-to-buy scheme are ripped off in three ways.
First, they are charged an exorbitant amount of rent. Often the rent charged is vastly more – sometimes double – the market rent.
Second, the “buyers” pay an exorbitant price for the home. Because there is no independent valuation, as would be required by a bank, the buyer agrees to a price for the home that is well above real value. This means that the “buyers” instantly have negative equity – they owe more than their home is worth. This puts them in a very difficult position if they ever wish to get out of the agreement they’ve signed.
Third, the “buyers” are not the owners of the homes they are buying. The home remains in the name of the person offering the rent-to-buy scheme. This means that even if the buyers make all their payments as agreed, they have no legal ownership of the property and can be instantly evicted if something goes wrong. If the person offering the rent-to-buy scheme defaults on a mortgage they hold or get into financial difficulty, the bank can foreclose on the home and kick the “buyers” out.
Why would someone agree to sign a rent-to-buy scheme? They are usually attractive to low-income, first home buyers who are unable to obtain mainstream finance for purchasing a home. Young couples without savings, the self-employed, former bankrupts, those with poor credit records, low-income earners generally:2 all such people may fall within the banner of those euphemistically titled ënon-conforming borrowers. They may feel like they have no other opportunities to own a home. The transactions often involve cheap homes in rural and regional areas. The First Home Owner Grant is the sole source of the deposit provided by the purchaser.
Entering into a rent-to-buy scheme exposes you to a wide range of problems.
- Poor quality dwellings
- Over-pricing of dwellings
- Over-charging of rent
- Interest being charged above bank rates
- Purchasers having no registered interest in the property – n the event of a dispute about the amount of the purchaserís equity in the property, the purchaser would be at a disadvantage because of their lack of registered interest.
- Misrepresentations regarding the nature and content of the contract
- No regulation under the Residential Tenancies Act and therefore no rights for the purchasers
- Purchasers being liable for rates, repairs and maintenance – Given the often poor condition of properties, the amount of money required to be spent to keep the property in a habitable condition can be considerable, and can be difficult for low income earners to afford.
Tim O’Dwyer, real estate advocate and consultant at Mitchells Solicitors, argues that consumers would be better off renting and saving the difference. Under a rent-to-buy scheme the obligation to maintain the property and to pay council rates, insurance and other outgoings lies with the purchaser. By contrast, under a rental agreement, these responsibilities remain with the landlord. Further, rent-to-buy contracts operate to deprive buyers from coverage of consumer protection legislation in each jurisdiction. In many cases they contain terms and conditions that are onerous and oppressive.
We always recommend that you see an independent lawyer before you sign anything. The cost in doing so is tiny compared to the risk that you’ll be tens of thousands of dollars worse off under a rent-to-buy scheme. Please contact us today for your free, 10-minute phone consultation.