Rent-to-Buy

Following up from my article on Vendor/Owner Finance I thought it was relevant to discuss a variant of Vendor Finance commonly known as Rent-to-Buy, Rent2Buy, Lease2Buy and Lease-to-Own. With Rent-to-Buy the tenant of the property enters an agreement with the landlord/owner of the property to rent the property for a period of time with the option to purchase the property at a future date.

The tenant may or may not be required to pay a bond/deposit upfront to the owner for the option to purchase the property. The property price is determined up front and the owner is obligated to sell the property to the tenant at a future date for that price. Usually the tenant will pay the owner an extra amount of money with each rental payment which will accumulate with the initial deposit paid. If the tenant decides to purchase the property the deposit paid along with the accumulated extra payments with the rent will be deducted from the sale price. If the tenant doesn’t take up the option to purchase the property they lose the deposit and any extra payments made.

There are two major benefits to owners/sellers of property who enter into a Rent-to-Buy instead of a Vendor/Owner Finance agreement:

Settlement happens earlier – With Vendor/Owner finance settlement occurs as per a normal bank mortgage loan so 25 to 30 years later. With Rent-to-Buy this can be shortened to any period so 12 months, 2 years, 5 years or what ever is agreed to by both parties.

Excellent tenants - The owner/seller doesnt need to worry about bad tenants as the tenants will more likely than not own the property in the near future. Meaning they are likely to look after the property and fix things which need fixing.

If we look at our discussion on Vendor/Owner Finance a similar ideology can be used there. The purchaser can move into the property and make rental payments to the owner. These rental payments are basically the loan repayments the purchaser has agreed to when they purchased and borrowed the money for the property from the Vendor/Owner. After a period of time when the purchaser/tenant has built up equity in the home they can approach a financial institution for a loan to repay the outstanding amount owing to the seller.

Rental prices have spiralled out of control across Australia, over the last couple of years we have seen annual increases in rent of around 20% in most capital cities. In some cases tenants are spending over 40% of their disposable income on rental payments making it impossible to save for a deposit on a home. This means the dream of many renters of owning their own home is slipping away as they are caught in this rental cycle.

A solution to this problem is a Rent-to-Buy agreement which allows renters to enter in a contract to purchase a property now while they slowly save a deposit on a property over a period of time. When the option to purchase the property does arise the tenant will already have the deposit necessary to approach a financial institution for a loan.

Housing affordability is at the top of the governments agenda and is something they will address over the coming years. Rent-to-Buy and Vendor/Owner Finance agreements are going to be something the Federal Government will embrace over the coming years as it is one of only a small number of solutions available to solve this crisis.