With housing affordability presenting more of a challenge for first home buyers, some are searching for property alternatives, such as the relatively controversial rent-to-own concept.
What is rent-to-own?
Rent-to-own or rent-to-buy schemes are effectively leasing arrangements, which provide for the rental of a property for an agreed period of time, plus additional payments, and at the end of a set time, the renter has the chance to buy the property.
Managing director of buyers’ agency Propertybuyer, Rich Harvey, says the schemes allow buyers – usually those unable to save a deposit and secure traditional bank finance – to “get into a home” without substantial upfront costs.
Harvey says the concept also provides an agreement on the final purchase price, meaning if the potential buyer decides to buy the property at the end of the lease period, the price is set.
Rent-to-buy contracts generally require the potential buyer to pay for repairs and maintenance, council rates, insurance and other outgoings, on top of rental payments.
What is the appeal of rent-to-own?
Harvey says the concept is a hot topic in the property industry because being able to save for a deposit is increasingly out of reach for many would-be buyers.
“With a median house price in some areas of $1.1 million, and needing to save 20% for a deposit – that means people are trying to save $220,000, which is out of reach for many. Aspiring owners are looking for other ways to get a foothold,” he says.
Harvey and consumer advocates agree rent-to-own schemes are risky.
“I’m not a big fan of them, because too many things can go wrong,” says Harvey.
“You’re not on the title, if you’re unable to make a payment, you can lose whatever equity you have built up, and you may end up paying an inflated price for the property.”
Harvey recommends potential buyers seek independent legal advice and look into rentvesting instead – where “you buy your first piece of real estate somewhere you might not want to live, but can afford to buy and rent it out as an investment property”.
A Consumer Affairs Victoria spokesperson described the rent-to-own schemes, which are offered across Australia and sometimes badged as ‘wrapping’ or ‘lease options’, as high-risk.
“Rent-to-buy schemes can present significant risks to potential home purchasers. Buyers have limited legal rights if something goes wrong.
“The rental period may last years and, if your circumstances change, you may be unable to complete the payments. If this happens, you won’t get your money back and will not have any claim over the property. Even if you complete the rental payments, you may still not obtain a home loan and lose not only the property, but also all the money you have spent,” the spokesperson says.
The financial situation of the vendor can also impact the potential buyer.
“If the vendor has a mortgage over the property and fails to keep up their own repayments, their lender has the right to repossess the property. In this case, the buyer would lose all rights to continue making payments towards eventual ownership of the property.”
Consumer Affairs Victoria recommends seeking independent legal and financial advice, “including having the contract checked, before buying or selling a property under a rent-to-buy scheme”