On the surface, rent-to-buy schemes look like the perfect deal. Pay rent for a period of time then the home is yours once you pay off the remaining fees? Seems like a smart way to start investing in your first home. With increasing property prices, this may appear like a good alternative to owning a home. And when it comes to frugal living in Australia, initially a clever idea.
Unfortunately in many cases, people end up losing their homes and the rental money they put towards it. So we’re here to give you the lowdown on what these schemes are and why they’re risky.
Rent-to-buy schemes – how do they work?
One thing to note is that it’s usually only offered by certain property developers across the country, so there will be fewer options than buying as a regular sale. This is because not many sellers won’t want to take this route and it’s much more feasible for bigger developers. So again, your choices are limited.
If you’ve found a home available for purchase with a rent-to-own scheme, a contract will be signed by you which ties you into monthly payments (or rent) for an average of two to five years. At the end of the contract term, the option is open for you to fully purchase the home by paying the remaining balance.
You can expect to pay more rent in these rent-to-own schemes than what’s the market average, even around 50-100% more than what you’d normally pay for that type of residence. Additionally, there may be a premium in lieu of the eventual purchase on top of the rent, as well as a deposit, at which point many renters might apply for a First Home Owners Grant. Some contracts could ask for other payments for stamp duty, insurance or building maintenance.
What this all looks like is a pretty hefty monthly “rental”. But at the end of the agreement, the monthly rental payments you made will be deducted from the final sale price.
What will I be paying for every month?
This really depends on the development and suburb. But as mentioned above, you can expect to pay above the market rental prices along with that extra premium. So let’s look at what you’re paying for:
- A deposit that goes towards the property purchase price at the end. This is non-refundable.
- Rental payments, which will be deducted from the final purchase price.
- Premiums like the “option-to-buy” fee. This may or may not go towards the purchase price.
- Fees for homeowners like mentioned above ie: building management, insurance, council rates
On average, you’re looking at about $600-900 a month. But again, this depends on your contract.
What are the risks of a rent-to-buy scheme?
They come aplenty. Many experts advise against these schemes for the reasons below:
- You don’t own it till you own it. This means that if somewhere along the line, you can no longer make payments, they can very easily evict you, and all the monthly surcharges you’ve paid wouldn’t have amounted to anything. This also applies to the end of the term when you’re required to pay the balance—if you cannot settle it, this leaves you without a home.
- You still need financing aid for the deposit and/or the final payment. The scheme will not assist you in this.
- There have been cases where the home owners are using this rent-to-buy property as collateral. SO what happens when security needs to collect is that the property can be seized. The contract rarely protects the participant in this situation.
- The final purchase price may be unrealistic. While the upside of these schemes is agreeing on the final price right at the start, it often happens that the price is inflated to a sum much higher than the market value.
Matt Peden, real estate agent & owner of Independent Property Group, encourages us to steer clear of these plans, saying “rent-to-buy scams are referred to as a seductive scam in the real estate world”.
He goes on to explain that “another way this scheme rips off investors is that the houses are not owned by the people paying the rent. Instead, they remain under ownership of the scammers and in case some payments are missed, they can evict the families or individuals residing in the house.”
Where do I find them properties that are rent-to-buy?
These schemes have been around for a while but because of their lack of popularity and the limited availability, they’re harder to find, even on property portals like Soho.
The best way is to use a search engine and key in “rent to buy” or “rent to own” to view the offerings out there.
How do I start the process if I’m interested?
If you’re ready to take on the risks of renting-to-own, you are brave indeed. But make sure you cover your bases to avoid being surprised further down the road. Here are a few steps to get you started:
- Look for the available rent-to-own properties online.
- Do research on the property to ensure it’s worth.
- Ask the seller about the property: why did they decide to go this route? Are they financially secure?
- Get legal advice: a solicitor will help you draft a contract that protects your rights and makes sure the monthly payments go towards the final purchase price.
- Make your payments in a timely manner.
- Secure financing through a home loan. You can use our mortgage calculator to figure out what your bank might offer.
- Make the property yours! If all goes according to plan, you will have fulfilled all the payments and gotten your right to the home.
Will bad credit affect a rent-to-own scheme?
It won’t affect it as much as it would a normal home sale. The owners of the property are less likely to depend on your credit report because you’re making a deposit and monthly rental payments. So if you default on these, they’re not really losing much.
What are the alternatives to these rent-to-buy schemes?
Because of the risk of these rent-to-own schemes, we do encourage you to explore other options before you make up your mind. Many property seekers opt for these schemes because of financial reasons, so here are some problem-based solutions to consider when you’ve found a home you want to buy:
- If you can’t make the deposit: look for low-deposit home loans that are there to assist buyers with small deposits. Just make sure you consider the Lenders Mortgage Insurance which could increase the payments.
- If you have a bad credit history: consider lenders who offer loans specifically for these types of borrowers. They just might come with higher fees and interest rates.
- If you don’t have proof of income for the loan: a low-doc home loan or no-doc mortgage can help you out. These work well for freelancers. Again, this may incur higher interest fees.
You might also want to look into build to rent model for renters. The benefits might surprise you.
More on rent to own schemes
Rent-to-buy schemes for Centrelink customers with bad credit
Rent-to-buy schemes can be a good option for Centrelink customers with bad credit, as they can help to build up your credit history and eventually purchase a home. However, it is important to shop around and compare different providers before you choose a rent-to-buy scheme, as the terms and conditions can vary.
Where can I find rent-to-own homes?
There are a number of ways to find rent-to-own homes in Australia. You can search online, contact real estate agents, or ask your friends and family for recommendations.
What’s a rent-to-own home contract?
A rent-to-own home contract is a legal document that outlines the terms and conditions of a rent-to-buy scheme. It is important to read the contract carefully before you sign it, so that you understand your rights and responsibilities.
What is a rent with option to purchase?
Rent with option to purchase (ROPS) is a type of rent-to-buy scheme. Under a ROPS agreement, you will rent a property for a period of time, and then you will have the option to purchase the property at the end of the lease.
What is a rent-to-own policy?
A rent-to-own policy is a type of insurance policy that can help to protect you if you are involved in a rent-to-buy scheme. The policy will typically cover you in the event that the property is damaged or if you are unable to complete the purchase of the property.
How do I find my dream home?
We’re glad you asked! Soho makes it super easy for you to browse properties and connect with agents. We’re also keeping you up to date with the country’s most affordable cities.
Browse our search page to check out some amazing listings available right now. But don’t just stop there, download our app to get the full Soho experience. Just remember to shortlist or swipe left on our listings so we can send you others that better match what you’re looking for.
