Rent to Own Your Home: The Good and the Bad of Rent-to-Buy Schemes
Most people dream of owning their own home, but with the ever-increasing price tag that comes with homeownership that dream feels far out of reach for most. That’s where the concept of rent-to-own comes in. With rent-to-own schemes, aspiring homeowners can rent a home for a fixed term, paying extra every month to go towards an eventual deposit to purchase that home. While this may sound like a perfect solution, rent-to-own schemes have a lot of drawbacks. To find out the pros, and the cons, of rent-to-own, as well as the steps needed to rent-to-buy your own home, keep reading more below.
What is rent-to-own?
Rent-to-own (RTO), also known as rent-for-keeps, rent-to-buy (RTB), or rent-try-buy is a scheme that gives aspiring homeowners the opportunity to rent a home with the understanding they will have the chance to purchase it in the future. The owner of the property, and the renter, agree upon a selling price and number of years (usually three to five) during which time the renter pays rent on the home as well as “option to buy” fees which go toward the eventual purchase of the property. After the agreed-upon number of years is up, the aspiring homeowner will have the option to purchase the property.
How does rent-to-buy work?
At its core, rent-to-own is a very simple concept:
- You rent a home for a specified amount of time under a RTB scheme
- After the specified amount of time, you purchase the home
Of course, the processes involved with first renting a home, and then later purchasing it are a bit more complicated, so below you can read more about both step one, and step two, of rent-to-buy schemes.
Renting your home with the intention of purchasing it
If you decide that RTO is right for you, your first step is to rent a home with the intention of purchasing it later.This includes finding a home under a rent-to-own scheme, which can prove difficult as it’s less common than your standard lease agreement.
Once you’ve found a home under a RTO deal, and given it a proper inspection like with any other rental property you might choose to live in, you will need to apply for the lease. Submitting a rental application with the intention of renting-to-buy is no different than applying for any other lease. You will still need to pay the costs associated with renting a home, including a non-refundable security deposit that goes to the final purchase price of the home, and get approved by the landlord. With rent-to-buy schemes most lease agreements last for three to five years before you have the option to purchase the property.
It’s important to note that there are often more costs that the renter needs to cover when leasing with a rent-to-buy scheme. This includes:
- A non-refundable deposit that goes towards the purchase price of the home
- Rent payments which do not go towards the purchase price of the property
- “Option-to-buy” fee which goes towards the final amount needed to purchase the property, but can be up to an additional 100% of the weekly rent.
- Home ownership fees including: Council rates, building management, and/or homeowners insurance
Purchasing your home after the rental period ends
At the end of the lease, usually between three and five years, you will have the option to purchase your home at the agreed upon price. The purchase price will be the agreed upon price, minus the non-refundable deposit and rent-to-own fees you paid during your rental period, and you will need to get a home loan from the bank.
If you are not approved for a home loan, you will lose the money already put towards the purchase of a house.
If your home loan is approved, the process of signing and transferring the title will be completed and you will own your home.
Pros and cons of rent-to-own homes
Rent-to-own schemes may sound like the perfect option for those who can’t yet afford to put a deposit down on their own home but still want to save for one later down the road but they’re not without serious risks. In fact, a 2016 Consumer Action Report was unable to identify a single rent-to-buy success story, and even state governments like the South Australia government warn against rent-to-buy schemes.
The renter has no legal claim on the property until they have successfully purchased it in full. This includes successfully applying for a home loan, and keeping up with all rental payments and additional fees for the entire duration of the agreed upon rental period.
If the renter misses a payment, they’re at risk of losing both the property and anything they paid to go towards their eventual purchase of the home.
Prices with rent-to-buy schemes are often inflated including the sales price of the home, cost of rent, and the additional “option-to-buy” fees which can increase your monthly payments by 50%-100%.
If the landlord/seller of the property has their assets seized by defaulting on loan repayments, the renter would not be able to purchase the house and any payments already made would be lost.
If the renter is not approved for a home loan and cannot purchase the house, they lose all the money already put towards the deposit.
It’s important to note that there are very few, if any, successful rent-to-buy examples in Australia and these risks are very serious. However, RTB does have it’s few positives.
With the sales price of the property set at the beginning of the agreement, the buyer is protected from real estate price increases later down the line. However it should be noted that costs with a rent-to-buy scheme are often inflated.
Rent-to-own does give aspiring homeowners a foot in the door when it comes to saving for home ownership.
Should I rent-to-buy?
If you’re considering a rent-to-own scheme, as a way to get your foot in the door of homeownership, you best bet on finding out if it’s the right option for you is to consult a legal expert. With RTO schemes, the risks are very high with very little legal recourse available if something does go wrong, and not a decision to be made lightly.
Consider the cost: Not only will you be paying an additional 50%-100% on your weekly rent for the next three to five years, but you might lose everything saved towards your deposit if something goes wrong.
Consider the loan: Even if you pay the rent plus option-to-buy fees diligently, will you be able to secure a home loan at the end of the rental term? If you're not approved for a loan, you might not get any payments back.
Consider your rights: If something goes wrong will you be able to get some, if not all, of the payments you already made returned to you?