About Rent to Buy Schemes

“Rent to Buy” schemes are generally marketed to potential purchasers who have difficulty obtaining finance from more conventional sources.

What do “Rent to Buy” schemes entail? Generally:

  • A seller signs up with a consultant to sell a house using a Rent to Buy scheme.
  • The house is advertised for sale on various websites.
  • A prospective buyer enters into a lease agreement to live in the house with an Option to Buy the house. The lease and the Option to Buy may be negotiated for any length of time but is usually two years to five years, depending on the situation.
  • The prospective buyer pays an initial Option Fee directly to the consultant. The initial Option Fee is subtracted from the purchase price of the house, reducing the amount received by the vendor. The initial Option Fee is likely to be about 3% to 5% of the purchase price.
  • The prospective buyer then moves into the house as a tenant and begins to pay rent in accordance with the lease agreement. Title to the property remains with the seller.
  • The prospective buyer also pays an ongoing Option Fee on a regular basis, which is subtracted from the purchase price of the house when the purchase is eventually settled. The ongoing Option Fee during the full period of the lease is likely to be 12% and 15% of the purchase price. It is important to note that, while the ongoing Option Fee is contributing to the purchase price of the house, the rent paid under the lease agreement is not.
  • At the conclusion of the lease period the purchaser can buy the house at the purchase price agreed to in the Option to Buy, minus the initial Option Fee and the ongoing Option Fees paid by the purchaser.
  • At the end of the option period the purchaser enters into a standard Contract for the Sale of Land or Strata Title with the vendor.
  • Settlement is then supposed to occur provided the purchaser has strictly complied with all the stringent rules in the lease and option agreements.

Issues and Pitfalls with Rent to Buy schemes

There are some issues and pitfalls with Rent to Buy schemes of which potential purchasers should be

If the purchaser is unable to continue with the actual purchase, the initial Option Fee and the ongoing Option Fee or Security Deposit is not refunded.

  • By accepting the Option Fees, the consultant may be acting in breach of the relevant State or Territory Real Estate and or Business Agent’s legislation and standard fidelity guarantee protections offered under these Acts, available to persons who sell or purchase their property through a licensed real estate agent; are not available to sellers or buyers who participate in Rent to Buy schemes.
  • In most cases, there is no tracking of progress in regards to ongoing Option Payments. Further, the ongoing Option Payments, which are intended to contribute to the purchase price, are not secured in a trust account.
  • Rent to Buy schemes tend to be promoted to purchasers who have difficulty obtaining other types of finance for houses. As such, there is no guarantee that the purchaser will be able to get a conventional housing loan at the end of the option period.
  • Depending on the details of the scheme, the consultants negotiating Rent to Buy schemes may require a real estate agent’s licence and triennial certificate.
  • Depending on the contracts tendered by the consultant negotiating the scheme, vendors may be in breach of the relevant Residential Tenancies legislation.
  • The buyer and seller are agreeing to a sale price when settlement could be up to five years away. Either party may be disadvantaged if the final sale price at settlement does not reflect the property’s current market value.
  • Sellers are bound to the contract for what could be a long period of time, during which they are unable to sell their home and liquidate their asset.