We delve into a product that could offer renters a viable path to homeownership
What is a rent-to-own scheme?
A rent-to-own scheme allows potential homeowners the chance to rent a home they will have the opportunity to buy. In other words, a portion of the rent you pay will go towards buying the home and you pay the remaining sum at the end of the rental period, which is agreed upon by the renter and the property owner.
As a renter, you are required to pay a non-refundable upfront fee, which holds the option for you to buy the home later. This fee, typically called the “option fee”, is generally negotiable but can reach as high as 5% of the cost of the initial rent-to-own agreement. If the renter decides against purchasing the home, the option fee is lost. If the renter opts to buy the home, the option fee is discounted from the future down payment.
How does it work?
The steps to a rent-to-own scheme usually happen as follows: you find a home you like; you research the property to ensure it is a good investment; you meet the owner of the property and make sure they are financially stable; you draft a contract after taking advice from a solicitor; sign the rental agreement; pay rent and your option fee; and after a pre-determined amount of time (typically 3-5 years), you buy the house.
Rent-to-own schemes are less common in Australia. In many cases, a third party or developer will offer a house for sale with a rent-to-own contract included. The rent that you may agree to with the owner is often significantly above the market rate. If you rent a house for $400, for instance, you could be expected to pay up to $800. In lieu of the potential buy, you could also be on the hook for a premium. It is also possible, if not likely, for the ultimate price to be higher when you are ready to buy.
Is it costly to do a rent-to-own scheme?
Depending on the home’s value, the costs of a rent-to-own scheme can vary widely. However, costs that you will have to pay when renting almost always include: a non-refundable deposit that is included in the overall costs of the house; payments that don’t go towards the ultimate price of the house; an option fee, which can be up to 5% of the total amount required to buy the home; homeowners fees; and the price of moving house.
Advantages of rent-to-own schemes
One of the advantages of rent-to-own schemes is that the renter or buyer is protected against real estate prices hikes in the future, since the price of the property is set at the start of the agreement. Rent-to-own schemes also afford a good opportunity for potential homeowners, but it is critical to consult a legal expert because the risks are quite high and there may be little legal recourse in the event the deal goes sour. When in doubt, consider the loan, consider the cost, and consider your rights.
Disadvantages of rent-to-own schemes
Since rent-to-own schemes typically attract those unable to purchase a home in a more traditional way, renters are vulnerable to predatory vendors, meaning these schemes can be quite risky. While it may sound like a great way for those who can’t yet afford a house, a 2016 Consumer Action Report wasn’t able to point out one rent-to-own success story and the South Australia government actually warned against the practice.
It is critical that renters understand these schemes come with many catches. You have zero ownership rights until you make the last payment on the home, and you could quite easily lose all the money you had paid if you default at any point during the contract.
Assess carefully if you really need to do a rent-to-own scheme
If you are considering a rent-to-own scheme, you should check the details of the contract throughout and ask for legal advice. Among the questions you should ask before pursuing a rent-to-buy scheme are: is the rent reasonable? Will I be in the position to purchase in 5 years’ time? Is the home priced appropriately in the market? and, if the buyer or the company can not settle, are there protections in place?
