Rent to Keep Schemes: How to Rent-to-buy in Australia
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-keep schemes can also have a lot of drawbacks. Keep reading to learn how rent to buy works and the pros & cons of rent-to-buy schemes.
What is Rent-to-own?
Rent-to-own (RTO), also commonly called rent-to-keep or rent-to-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 future selling price and the number of years (usually three to five) the renter will pay the rent on the home.
The renter also pays a non-refundable upfront fee called the “option fee" which gives them the right to have the option to purchase the home later.
- What is an option fee with rent-to-own?
- An option fee is an upfront fee that is paid by the renter to the seller for the eventual "option to buy" the home once the rent-to-keep agreement has ended.
The option fee is typically negotiable and tends to be between one and five per cent of the total purchase price that is agreed at the beginning of the rent-to-keep agreement.
After the agreement has finished, the renter will have the option to purchase the property for the previously agreed-upon price. If the renter decides not to buy the home, then the option fee is lost and both parties are free to leave without obligations.
If the renter decides to continue with the purchase of the property, then the option fee is later discounted from the future downpayment on the property at the time of sale.
How Does Rent-to-buy Work?
Below, we cover the steps to a rent-to-keep agreement in more detail, including pitfalls to watch out for.
However, in short, the steps for rent-to-keep agreements are as follows:
- Identify a home that interests you
- Research if the property is a good investment
- Speak to the owner & Confirm they are financially stable
- Get advice from a solicitor & draft a contract
- Sign the rental agreement
- Pay your rent and option to buy fees.
- After the specified amount of time, you purchase the home.
1. Identify a Home That Interests You
First, you will need to find a home that offers rent-to-buy.
There are usually very few homes on the market that allow rent-to-keep agreements, therefore the search may be difficult. You can always find a normal home to rent and ask the owner if you could have the option to eventually buy the home.
2. Research If the Property Is a Good Investment
You will first want to research if the property is a good investment.
When looking for a property to invest in consider:
- The current price of the property
- The condition the property is in
- Is it in a good neighbourhood?
- What is the average rent in the area?
- Will the property increase in value?
3. Speak to the Owner & Confirm They Are Financially Stable
When you rent to buy a property, you will be locked into an agreement with the home's owner.
Therefore, this step in the rent-to-keep process is quite important. If the homeowner has their assets seized, you will lose all rights to purchase the property including all you have paid toward it.
On the other hand, if you fail to make payment on your rent, many rent-to-own schemes allow homeowners to end the contract and keep all previous payments you have made.
If the home's owner is not financially stable, rent-to-buy schemes can act as an opportunity for untrustworthy people to take advantage of renters. For this reason, most rent-to-own schemes are illegal in places like South Australia.
4. Get Advice from a Solicitor & Draft a Contract
You will want to have an independent solicitor take a look over the rent-to-own agreement.
There are many caveats to rent-to-buy. For example, if you can no longer afford the rental payments or miss a rental payment, it typically breaks the lease and you could lose the entire amount you've already paid on the home. Therefore, it's best to fully understand the commitment before signing an agreement.
You can ask a solicitor that is familiar with rent-to-keep schemes to help you draft an agreement to take to the seller. This way you can assure that the agreement is favourable to both parties.
5. Sign a Rental Agreement
With rent-to-buy schemes, most lease agreements last for three to five years before you have the option to purchase the property.
6. Pay Your Rent and Option to Buy Fees
Paying your rent on time is usually one of the stipulations in the contract for rent-to-keep schemes.
If you miss a rent payment, sometimes this can annul the rent-to-own agreement leaving you in debt. Therefore, it's important to be sure that you can and will continue to be able to afford your rent and the option fee before you decide to enter into an agreement.
7. Purchase the Home
The typical rent-to-own agreement lasts between three and five years.
At the end of the agreement, you will have the option to purchase the home.
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!
How Much Does it Cost to Rent-to-own?
The cost to rent to own changes depending on the total value of the house.
However, some of the costs you can expect to pay when renting to own include:
- A non-refundable deposit that goes towards the purchase price of the home
- Rental bond and rent payments that do not go towards the purchase price of the property
- An “option-to-buy” usually 1-5% of the amount needed to purchase the property
- Homeownership fees: Property tax, council rates, building management, and/or homeowners insurance
- The costs of moving house
If you are considering a rent-to-keep agreement:Don't forget to check out our guides on organising your move! Find tips for moving as well as help for moving your energy connection / internet connection!
Pros & Cons of Rent-to-own Homes
Rent-to-keep 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. Even state governments like the South Australia government warn against rent-to-buy schemes.
The cons of rent-to-buy schemes are:
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, the Pros of rent-to-keep schemes are:
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 homeownership.
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 rent-to-keep 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. For example, a rent-to-keep agreement could sound attractive to those currently on rent assistance, but could actually leave them worse off in the end.
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 and then have to pay moving costs as well.
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?