Rent-to-own is emerging as a new route to home ownership, but is it worth it?
Many tenants would be nervous about putting a nail in the wall, let alone a backyard pool.
But Andrew Robertson has signed no ordinary contract.
“We bought the house but not bought the house,” Mr. Robertson said.
The Gold Coast father has entered into a rent-to-own agreement, which means that if all goes according to plan, he will one day own his home.
Had he gone to a bank, Mr. Robertson would have needed a down payment of around $150,000 to buy the Pacific Pines home.
Instead, he paid around $36,000 to one of two rent-to-own companies that launched in Queensland in the past year.
“It’s been fantastic for us,” he said.
“Trying to save and rent at the same time – the way the real estate market keeps going up – it’s pretty hard to know where you need to go.
“We would have aimed for a certain deposit amount for a certain property, but by the time we got there, that required deposit for that property would be higher again.”
An academic warns that the rent-to-own model, touted as ‘a new route to home ownership’, is risky as prices are locked in regardless of market behavior.
“Buyers need to be very conscious of what they are signing up for,” said Professor Shaun Bond of the University of Queensland’s business school.
How do lease-purchase agreements work?
As the name suggests, you are renting a house with the option of eventually buying it.
Companies buy the property and the client pays them a lower than normal deposit.
In Mr. Robertson’s case, the initial fee was 3% of the agreed value of the house.
The customer then pays an ongoing fee, much like rent but also covers the charges. A portion of these costs are saved as home equity.
Once enough equity is accumulated, the client obtains a regular home loan and title passes to them.
James Bowe, the co-founder of OwnHome, said the model is designed to allow people to save for their home while living there.
“What you’re doing is locking in the price at which you can redeem this property,” Mr Bowe said.
Dean Arnold, the founder of PublicSquare, said the deal looked like a “forced savings mechanism” that would help buyers move into their own homes “up to 10 years earlier”.
“We like to see our clients build up at least 2.5% equity per year, which means by year four they have 10% equity and can take out a traditional mortgage,” said said Mr. Arnold.
What’s the catch?
If the property market goes down, you could end up paying more for the house than it’s worth, Professor Bond has warned.
Under the contract, the agreed price of the property increases every year – with OwnHome, 3.8% per year.
“Prices are actually starting to fall again, so buyers need to be very aware to lock in future price increases when we’ve clearly passed the peak,” Professor Bond said.
But Mr Bowe said that historically prices have always risen over the long term.
“We certainly don’t have a crystal ball on how real estate markets are going to evolve,” he said.
“What we have seen over the last century is that there has never been a seven or ten year period in which property prices have ended up lower than they were. were at the beginning of this period of seven to ten years.”
Mr Arnold admitted that a slowdown, or an increase of less than 3% per year, would be a “financial disadvantage” for customers.
He said, however, that his company’s customers are in it for the long haul.
“They don’t really think about what the market is going to do in three or four years,” he said.
“They think I’m going to live in this house for 10 to 20 years.
“Historically, it’s a safe bet that the market will exceed three percent [per year] that we charge.”
Mr Robertson said that, based on historical prices in his suburbs, he was not “overly concerned” about falling prices.
“But it’s obviously in the back of your mind,” he said.
How do the payments compare to a regular rental?
“They’re a bit higher,” Mr. Arnold said.
“But imagine if you were serious about building up a deposit of $100,000 or more 10 years from now, you’re going to be saving hundreds of dollars a week on top of rent.”
Mr Robertson said his current ‘rent to buy’ payments were lower than the rent he was previously paying.
“For us, in that regard, it’s no different financially, except this time we’re going to our own house rather than someone else’s mortgage,” he said.
Mr Bowe said running costs for his business include water rates, council rates, maintenance and repairs.
“We take care of all the things that you would typically expect your landlord to take care of,” he said.
By comparison, Mr. Arnold said that under his company’s leases, the tenant pays the maintenance costs.
“It’s just deducted from the overall down payment they accumulate. It also allows them to possibly do renovations on the house,” he said.
“They don’t have to wait to exercise the purchase option to upgrade their home with renovations and add value to the home.”
Professor Bond said it was important for customers to remember that they do not own the property during the rental period.
“They may not qualify for a mortgage at the end of their term,” he said.
“If property prices fall again, banks may be reluctant to lend at the previously agreed price.”
OwnHome and PublicSquare said they performed the same credit checks as banks.
“We want to make sure that when we put [potential buyers] in one of our homes, they’ll be ready to switch to a traditional mortgage and meet all the requirements of those lenders,” Arnold said.
Professor Bond said another major risk was if the lease-to-own provider ran into financial difficulties.
“If they miss their payments, this property could be seized by their borrower and the tenant and intended buyer would have no claims,” he said.
“That could leave the potential buyer on the hook.”
Mr Bowe said OwnHome was backed by a major bank.
Anyone considering such a deal should seek independent legal and financial advice, Professor Bond added.
“Unfortunately, there has been a lot of concern that some of these schemes in the United States tend to exploit low-income people,” he said.
“I’m not saying Australian companies have a similar model, but there is some concern about the history of these products.
“There have been versions of this [in Australia] offered by small owners in the past.
“We can’t name many successes where it really helped people.”
OwnHome and PublicSquare said they each received 3,000 applications from Queenslanders.
“We will try to accommodate as many people as possible, but there is definitely a waiting list at this stage.”
“There are 270,000 tenants in Brisbane who are more than able to make the payments or equivalent payments for a mortgage and the vast majority of them don’t have access to mum and dad’s bank,” Mr. Bowe.
“This is increasingly becoming the deciding factor in whether you are able to free yourself from the rental trap.”
Professor Bond said the rent-to-own model could suit new immigrants.
“Somebody just moved to Australia, he’s got a great professional job, but he doesn’t have a lot of credit history here,” he said.
“This type of diet could be an alternative for someone in this situation.”
Professor Bond said this could provide more certainty for tenants, who are often evicted from their homes when rising prices prompt landlords to sell.
“They can actually have some security of tenure for a longer period of time than a traditional tenancy has given them,” he said.
Professor Bond said those who are organized with their finances might be better off saving up for the full deposit while living in a regular rental.
“Set a goal over a three to five year period where they’re going to put money aside to work on their deposit.”