Rent to Buy

G’day “SomerSofters”,

Geez it’s been a while since I posted (or even logged in to be honest) but I have a question for those of you more experienced users.

We’ve been trying to sell a house in the ACT since Nov 2011 (We moved out in Dec). The bank payments have been killing me due to the vacancy, so I decided to rent it instead for a while.

A potential tenant has submitted an application to rent and stated that they saw it whilst it was in “SALE” mode. Apparently they can’t afford the deposit to buy at the moment, but said they are willing to rent (for a significantly lower rent than advertised, I might add) with a view to buying. Their offer is a 24 month lease, at a 25% discount in rent, and buying after the 24 months are up.

I’ve always been anti "Wrap / option / weird contract type of deals" at the best of times. Generally if I don’t understand it I stay away from it.

My concerns are:

  • The rent in these types of deals is usually higher than market value, not lower. Correct? The assumption being that the excess is put toward the purchase costs or discounted from the final settlement figure (or something to that effect). I’m certainly not renting it for 25% less than its worth. So that’s a deal breaker to start with.

But assuming the rent could be worked out:

  1. When a Property is purchased under normal conditions It is sold after much building / pest and conveyancing inspection. Effectively the buyer buys what he sees. There is no recourse for after sale repairs or any maintenance. What distinction would exist between standard “Rental Maintenance” and deeper “House repairs”. If I own a house and after 12 months I discover an issue – I fix it. This could be seen in the same light as an interested buyer taking out insurance on a house immediately after exchange of contracts. They have what’s known in the industry as an “Insurable interest”, and I would probably insist that they did.

  2. During the 2 year period I will be acting in two roles (Landlord and vendor). Could this cause a conflict of interest? (Not sure - just thinking out loud here)

  3. I would want to have an exchange of contracts completed at the time of entering into the agreement, but they can’t afford a Deposit at the moment, so what chance is there that they will be able to secure finance to effect such exchange.

I welcome your “constructive feedback”

Happy Easter and best regards to all

Pedro
 
i don't know a lot about rent to buy either. but from what i gather the advantage to a land lord is that you get higher rent and hope they can not buy. lovely.

seems like this guy is doing the opposite. pay less rent then don't buy.
 
With our Rent to Own contracts (Canada) our contracts are in separated into 3.
Rental Lease
Option to Purchase
Purchase agreement

In the case you are presenting, I'd also say no.

We almost bought a property last year in rural NSW.It was set up a bit different, in that we weren't paying any interest. It was a cheap property and would have been paid off in 69 months. We decided not to go thru, because it was too far from an airport.

The purchase price was $69k. We offered $1k a month until paid. If we defaulted, he could keep all money paid and consider it rent. The conditions were we paid all outgoings. Any improvements remained with the property. Any work over $1000 must be with vendor approval.All maintenace and repairs were our responsibility. The conditions concerning bankruptcy,insanity,death were deleted from both sides. Our beneficiaries or assigns must continue with the contract.
His lawyer was in agreement with these conditions.

If we were to own your property in the ACT and offer it as a rent to own, it would be a higher purchase price, to allow for capital gains in 2 years time.
Market rent, and allow for fixed scheduled increases for the 2 year lease.
A one time downpayment (a % of the purchase price)
A monthly Option payment (% of the purchase price / 24 months)
The tenants would be required to do their own DD before signing any contracts. They would also be advised in the contract to consult a lawyer for advise.(we always provide them a draft contract)

All maintenance and repairs are their responsibility.
They are required to provide a bond.
Any improvements remain with the property.
Any work over the value of $1k must be with written approval from you.
Scheduled inspections, as per rental lease.
They are purchasing an Option only. If they cannot obtain finance, or decide not to buy, all money is considered rent, and they must vacate.

Our lawyer always tells us to pay for taxes and property insurance.(to protect our interests)

If you decide to go this route, have your lawyer write the contract, but make sure you inform him what you want it to include, and exclude.
The contract should be biased in your favor, as you are not permitted to sell this property for 24 months , unless the buyer defaults.

Nice to see you posting again :)
 
Pedro

Doesn't sound too good from your angle.

Do the purchasers want an installment contract or a lease with an option to purchase?

With installment contracts you will exchange contracts and then have a long settlement - 30 years perhaps. In the mean time you will give them a licence to occupy.

With a lease option they will just be tenants and then have an option to purchase from you at some time in the future. There is no guarantee that they will pay you, so if they are paying low rent and decide to not buy then you lose out - except you get to keep the option fee. You should probably charge them at least 1% of the value as an option fee. The strike price is what they will pay for the property and this could be market value now, market value at the time of the purchase or whatever you decide.
 
With all my "rent to own" properties the purchaser pays a deposit and higher "rent" - and that extra goes towards paying off the property when they finally refinance and fully buy.

Sounds like they're trying one on you.
 
Hi Pedro

We've been running our real estate vendor finance business since 2003 and, after making some classics mistakes early on ;-) our golden rule now is that we let no one into a property with no money down.

My suggestion; if you are considering selling the property with vendor finance, i.e. a Rent To Own (Lease/Option) or an Instalment Contract, focus on vendor finance for a fixed period of time and set your marketing to 'vendor finance''. I believe you will be surprised at the number of interested buyers that will contact you.

Cheers, Paul
 
Thanks everyone for your feedback,

Yes its good to be back Kathryn.

I spoke to my Lawyer yesterday and he made some similar suggestions to those posted here. He's not in favour of the "rent to own" concept but he did say that my best counter offer would be to suggest to the buyers:

  • a sale contract exchanged at the start of the agreement, with
  • a 24 month settlement
  • a Licence to occupy for 24 months, with
  • annual review of the licence fee
  • absolutely NO maintenance paid by us

The licence fee effectively takes it out of the realm of a normal rental agreement and none of the rules of tenancy apply. So no tribunals, no bond is payable, no condition report etc. But they are bound to continue with the purchase under normal sales procedures.

So that's what I'll do. I get the feeling that when they hear these terms, they will go scurrying into the woods and I'll never hear from them again - but thats life. There will be others.

Thanks everyone

Pedro:)
 
Hey Pedro

That sounds promising. But if they are paying less than market rent, and presumably market rent doesn't cover the mortgage (I'm guessing), you will be substantially out of pocket? And for two years they would be getting a property for less than they could either rent or buy? Subsidised by yourself.

They also don't have any "hurt" money. So if they decided to walk out after two years, even though they are legally bound to honour the contract, they will no money in it. It may be very tempting for them.

I know that this property is hurting your pockets, so it's a difficult place to be in, and it may be better for you than where you are right now. I would be asking for at least some substantial up front payment- at very minimum your fees, but ideally somewhat more. Your lawyer for instance would not be unhappy at the extra fees he will be getting.
 
G'day Geoff,

Fancy meeting you here ! Can you deliver an Italian BMT, with all the salad (No pickles or jalapenos) for lunch? :D

Oh there will be plenty of HURT money in place to protect me. My lawyer has stated that he can draft things in such a way that they will forfeit their deposit if they don't complete their purchase, and if I then have to sell to another party at a lower than the agreed price, sue them for the difference. Yes the legal beagles will get their cut but it does give a big motivating factor to the other side.

As for me subsidising their occupancy. I am proposing a 10% discount in rent IN THE FIRST YEAR only. I think that's a reasonable price for me to pay to wash my hands of all maintenance. Second year they are back to Market value, and still they pay for the maintenance.;)

I wont be out of pocket. Even at 10% below it more than covers the Mortgage. Remember the granny flat?
 
G'day Geoff,

Fancy meeting you here ! Can you deliver an Italian BMT, with all the salad (No pickles or jalapenos) for lunch? :D

Oh there will be plenty of HURT money in place to protect me. My lawyer has stated that he can draft things in such a way that they will forfeit their deposit if they don't complete their purchase, and if I then have to sell to another party at a lower than the agreed price, sue them for the difference. Yes the legal beagles will get their cut but it does give a big motivating factor to the other side.

As for me subsidising their occupancy. I am proposing a 10% discount in rent IN THE FIRST YEAR only. I think that's a reasonable price for me to pay to wash my hands of all maintenance. Second year they are back to Market value, and still they pay for the maintenance.;)

I wont be out of pocket. Even at 10% below it more than covers the Mortgage. Remember the granny flat?

What sort of deposit are you looking at?

Also, consider that you cannot get blood from a stone! No point in suing and incurring legal expenses if they have no assets which you can take.
 
Ok that's sounding promising.

Yes I do remember the granny flat. We took a look through it on one of your opens -) thought I wasn't sure if the new arrangement was a discount on combined rents or on a single rent for the main residence only.

Some forumites may remember your posts on creating the granny flat. It's a pity you didn't post the details of the sale in here. Some may have been interested in a cash flow positive property with good growth prospects.

If they won't go for that 10% cut it may be worth while suggesting a higher sell price. Just a thought.
 
What sort of deposit are you looking at?

Also, consider that you cannot get blood from a stone! No point in suing and incurring legal expenses if they have no assets which you can take.

I had thought that the standard 10% would be acceptable for me, unless there are good reasons to increase that. Too much more and I risk turning them right off the deal.

In any case the whole thing is probably going to go belly up because their original reason for not buying now is that they don't currently have a deposit.

And yes I agree that litigation is never a profitable exercise.
 
Yes, that lack of deposit you mentioned in the first post was the reason I mentioned the Hirt money. It may be possible to go for a lower deposit, perhaps in return do a higher price, but not too low. Perhaps 5% may be acceptable- but any less than that, they would be showing that they don't have the ability to really save money, and would potentially pose a risk.
 
I was thinking they had a smaller deposit too. 10% is not bad, but think after 2 years of mucking around and they don't settle and have no other money is it worth it.

Also consider stamp duty. Don't know the rules in ACT, but if it was NSW they would have to pay stamp duty within 3 months of exchange
 
Hi Pedro

What you have described above is an Instalment Contract. From information received from the two most prominent vendor finance specialist lawyers in NSW, about 10 to12 Instalment Contracts are written up by both of them each week. I say this as your lawyer may not be familiar with the intricacies of Instalment Contracts and you may pay some serious money for her/him to effectively re-invent the wheel.

By moving away from a Lease/Option (Rent To Own) you do move away from the Residential Tenancies Act but, if you sell your property to a 'consumer' with an Instalment Contract, the Instalment Contract will be regulated by the National Credit Code (NCC), as your Instalment Contract is a credit contract.

Because of this you have to work out if you need Australian Credit Licence (ACL) coverage for the transaction. As you are probably not conducting this transaction 'in the course of a business' you may not need ACL coverage but this does not exempt you from conducting the transaction in accordance with the NCC.

Another challenge with your lawyers structuring of his/her Instalment Contract proposal is the 24 month term. This effective means the credit (loan) term is 24 months with a balloon payment at the end of the term. Under ASIC's Responsible Lending Conduct, balloon payments leave you open to a claim that you did not conduct sufficient enquiries & verification of a borrower's ability to meet all the payments required by the Instalment Contract.

There are ways around all these challenges and I suggest you get some vendor finance specific advice from a vendor finance savvy solicitor.

Cheers, Paul
 
I was thinking they had a smaller deposit too. 10% is not bad, but think after 2 years of mucking around and they don't settle and have no other money is it worth it.

Also consider stamp duty. Don't know the rules in ACT, but if it was NSW they would have to pay stamp duty within 3 months of exchange

if they had 10% (or maybe even 5%) wouldn't they just buy it outright?

This stinks of a tenant just trying to get discounted rent. then walking away after two years, saying sue me, I've got nothing.

i'm sure once the prospective purchaser sees the OPs conditions they will stop returning calls.
 
if they had 10% (or maybe even 5%) wouldn't they just buy it outright?

This stinks of a tenant just trying to get discounted rent. then walking away after two years, saying sue me, I've got nothing.

i'm sure once the prospective purchaser sees the OPs conditions they will stop returning calls.

Possibly, but they could have a temp (or long term) impediment. eg. maybe they have just come back from overseas and no job history etc
 
I think Terry is right. The agent stated that they are new to Australia (from South Africa). He has secured employment in IT with a 6 figure sum and she is apparently a school teacher yet to be employed. So their earning capacity is not in question but naturally they are trying to squeeze as much as they can out of the deal.

But Ed makes a valid point. They wont go through it because if they had the deposit they would just buy the place and not propose the alternative they have.

Wether they are simply trying to get 2 years of cheap rent or not, I dont know but we'll see what happens. This thing has a low probability of going ahead.
 
It used to be the case that departing South Africans were not allowed to take much money out with them. If that was the case it would explain the lack of deposit without reflecting badly on savings history.
 
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