Lease Options

In this post I consider some examples of rent-to-buy houses (lease options) which were provided by the people who promote them.  Even these positive examples offer very little benefit to an unsophisticated ‘buyer’ in exchange for significant financial risk.

It appears that the only ‘buyers’ who have a hope of eventually owning a lease-option house are those who can afford to pay rent and put aside enough for a house deposit over 2-3 years – that is those who could own their own home without a lease option.

I have previously described some “creative property”  strategies, including lease options and outlined the risks.

What is a lease option?

A lease option is combination of a lease (property rental) and an ‘option to purchase’.  The ‘option to purchase’ gives the tenant the right to buy the property for an agreed amount before the end of the term of the contract (usually 2-5 years).   While some people in the industry have concerns about the use of lease options, they appear to be widely used.

The tenant pays a fee for the option to purchase.  The option fee is made up of an upfront “deposit” and monthly payments.  The total option fee may be between $20,000 – $70,000 or more.  Rent is paid in addition to the option fee.  The rent amount is unlikely to be below ‘market rent’ and is often higher.

If the purchase proceeds, the option fee (or sometimes just part of the option fee) is credited towards the purchase.

Problems and Risks

 The property price may be too high, or the increase in value too small, to give the tenant adequate equity to qualify for finance.  Within these short periods, property values can stagnate, or even decrease.

Some of the other risks for potential “buyers” are:

  • Paying an amount that often equals double rent, and paying rates and maintenance, may not be sustainable for the ‘buyer’;
  • The ‘buyer’ may not be approved for mortgage finance at the end of the period, which usually means the buyer will usually lose the entire option fee paid;
  • If the seller has outstanding debts, the house could be sold by creditors, and the ‘buyer’ may lose all payments made (lease options are sometimes promoted to sellers with debt problems, so it’s not unusual for “sellers” to be in financial difficulty).

The complexity of these agreements makes it easy for a seller, or intermediary, to exploit someone who hopes to own their own home.  Unfair elements of contracts may include:

  • above market rent (in addition to the option fee);
  • high option fee (both up-front payments and monthly payments);
  • only part of a large option fee may be credited towards the price of the house;
  • it may be foreseeable at the time of signing the agreement that the tenant will never be able to purchase the property.

Continue reading

Posted in Rent to Buy, Rent to Buy Houses, rent to own, Rick Otton, vendor terms | Tagged , , , , , | Leave a comment

One more ‘rent-to-buy’ risk – property values

In addition to all the other risks associated with rent-to-buy/vendor finance deals, the ‘buyer’ must gamble on a minimum increase in property value over a short-term.  An examination of some historic property price fluctuations shows how high this risk this is.

Many lease option agreements are for terms of 2-3 years.  Many vendor finance arrangements are set for a maximum of 3-5 years (or financial penalties are imposed if they extend beyond this time).

The potential buyer will usually lose all money paid if a mortgage application is unsuccessful at the end of the term, resulting in a wind-fall for the seller or investor.  One factor that will influence a mortgage lending decision at the end of the rent-to-buy period is the lender’s valuation of the property.  If the property is over-priced and/or the value doesn’t increase significantly, the mortgage application may be rejected.  The “buyer” will lose everything and the seller will make a big wind-fall.

‘Rent-to-buy’ properties are often priced at a premium – often 10-15% above the seller’s (or intermediary’s) value estimate, but consumer representatives are aware of uplifts of up to 30%.

So, regardless of all the other factors that may influence a mortgage application (such as the consumer’s credit record, employment history, income and accumulated funds), an inadequate increase in property value is likely to kill the deal.  Depending on the contract  terms and price, an increase of between 5% and 15% per annum may be needed – or even more.

An increase in prices over these short terms can’t be guaranteed, let alone a large increase because property prices can be volatile within these short term frames.  Add to this that some of the locations where these houses are located may experience lower than average growth.

In five Victorian locations where houses have been the subject of ‘rent-to-buy’ or vendor finance deals, the average annual increase in median prices over 2004-2014 ranged from 3.8% to 5%.  However, prices decreased in each location over at least one year, and over at least a two-year period in 4 of the locations.  In one location (Craigieburn) prices decreased over a 4-year period from 2010-2014.

Look back further and consider five locations where these deals were done in the early 2000s.  Average increases in median prices in those locations over 1992 – 2002 ranged from 2.5% – 7.4%.  However, excluding the two years of highest growth, average median price increases ranged from negative 0.8% to 4.4%.  There were a number of years of negative growth in all five locations.  In two of the locations (Morwell and Wendouree) median prices had actually fallen between 1992 and 1997.

Further details about these price fluctuations  Continue reading

Posted in Rent to Buy, Rent to Buy Houses, rent to own, vendor terms | Tagged , , , | 7 Comments

Telemarketing, ‘Do Not Call’, and the The Property Investment Link 

Note: Optima Wealth Solutions is a property investment firm which  shares a phone number with Optima Lending Solutions and Optima Homes.  It is not related to Optima Group, Optima Lending or Optima Wealth Management who do not use telemarketers.

Why do we still get telemarketing calls when we’re listed on “Do-Not-Call” Register (DNCR) – and is the regulator, Australian Communications and Media Authority (ACMA), doing enough to stop it?

Infotronics and Lead Generation

An overseas-based call centre, Infotronics, has been breaching the DNCR laws for years, calling people who are listed on the DNCR.  Infotronics makes “lead generation” calls – meaning that it sells the personal details of consumers (obtained during the telemarketing calls) on to property investment businesses in Australia.

Infotronics identifies itself by different names, including ‘IMS’ and ‘Payless Solutions’.  It doesn’t identify the name of the Australian business that might be the end-user of the information.

ACMA confirm that Infotronics appears “to make cold calls asking questions about the consumer’s personal, lifestyle and financial circumstances. Consumers often receive a further call advising that they have ‘qualified’ for a financial service and offer to forward their details to an Australian-based company for a follow up call or appointment.

I complained about ‘Infotronics’ in September 2013, and ACMA said it “..understands that Infotronics is taking significant steps to improve its compliance with the DNC legislation.”

When I complained about Infotronics again more than 2 years later, ACMA advised that “Infotronics is currently at the ‘warn’ stage of the ACMA’s DNC Register Complaint handling policy.

One might wonder how it takes more than 2 years for a problematic call centre to reach the “warn” stage, and how many thousands of calls will be made before it’s time for further action.  To be fair, it can be difficult for ACMA to enforce our laws against overseas call centres (even though our laws apply if they call Australians).  So surely ACMA should be taking action against the Australian property investment businesses, that for years, have benefited from the illegal conduct of ‘Infotronics’.

WIT Group, Optima Wealth Solutions, Accrue Property

Continue reading

Posted in Consumer issues - general, Uncategorized | Tagged , , , , , , | 4 Comments

Shocked by education costs? – why anxiety about your child’s education can make you vulnerable

We are often reminded about the cost of educating our children at this time of year – not just because we’re paying for school books, uniforms and fees, but by media reports about the high costs of education. These cost estimates are often intended to shock.

I recently checked out the education cost estimates calculator on the Australian Scholarships Group’s (ASG) website.  In today’s figures, the cost for a student doing a university course similar to one our daughter recently completed was $37,395 per year for a student living away from home.  We paid about $4,500 per year.

At the end of 2014, our daughter completed the final year of her Masters degree at Sydney University.  We live in Melbourne.  She lived in shared housing in Sydney.  In total we paid less than $2,000 for set-up costs in 2013 (bond, rent in advance, bedroom furniture) and less than $3,500 each year to subsidise her living expenses.  All other expenses, including text books and equipment, were covered by her fortnightly Centrelink youth allowance income, and a total of only 75 hours employment she obtained during 2013.

Generally youth allowance isn’t paid to students under 22 unless they need to study a considerable distance from home so our situation is not typical.  Of course everyone’s circumstances and needs are different and some parents would like to be able to provide more financial help, and to pay fees up-front rather than have their child incur a HECS debt which our daughter will repay from her future salary.

While the ASG calculator is intended as a guide, it estimates education costs without accounting for the option to pay off HECS or for any income entitlement from Centrelink – and it includes the costs of supporting a university student living at home, including food and groceries. This illustrates how important it is to think carefully about any financial decisions you make now, not to be overwhelmed by the hype – and not to rely on an organisation that is trying to sell you an investment product to estimate how much you might need for university (or anything else such as retirement).

Saving for your children’s education

Of course education can be expensive – particularly for children in the private system, and I’m not suggesting that planning is a bad idea.

ASIC and CHOICE suggest that parents consider a range of options to plan for education costs, including using funds to pay your mortgage off early (thereby freeing up money for education later on) or using a mortgage offset account that you can draw on in the future.

Think carefully before locking yourself into schemes that may not be flexible enough to respond to changing circumstances in the future.  Your family’s needs can change with divorce, health issues, the need to pay-down debt – or even financial opportunities that arise.

Education bonds (such as those provided by ASG) are one option although they do lack flexibility and in the case of ASG, in the event that a child doesn’t go on to higher education, the contributions are repaid but the earnings stay in the pool for the benefit of other students.

There are also time restrictions.  A student who takes three years post-secondary to start a university course (as our daughter did) may be ineligible, and would benefit from having access to funds in an off-set account or more flexible investment.

“Barefoot Investor”, Scott Pape sees some benefits in education bonds, but he has criticised ASG for an “antiquated system that financially penalises your kid if they choose not to go on to higher education – a trap that many well meaning parents don’t realise until it’s too late.”

Parental anxiety makes us vulnerable as consumers

Parental anxiety about their child’s education can make us vulnerable to selling methods that exploit the desire to do the best for our children.  For example, research undertaken by Deakin University and Consumer Action Law Centre studied the psychological drivers behind parents who paid up to $10,000 for mathematics software that was sold by sales people who visited their homes.  Many clients of  Consumer Action found that their children  stopped using the software after a few weeks.  Building parental anxiety was a key driver to sales, and those who purchased tended to be those who were most anxious about their children’s schooling.

The study did not consider the sale of education bonds, however the findings about parental anxiety could be relevant to the decision some parents make to invest.  In relation to the sale of educational software the research found that ‘in-home salespeople attempt to manipulate parents’ emotions by stimulating their concern and anxiety regarding their children’s education, and their future employment prospects. Further, parents’ concern about their ability to help their children enhances the effectiveness of this approach. The technique of activating guilt among parents was also found to be an important element of the success of the sales process.”

You can view a 15 minute film “Shutting the Gates” based on this research.

Subtle selling techniques can place parents in a position where they feel that by refusing the offer, they are demonstrating  disinterest in their children’s success – which they may instinctively reject by signing on the dotted line.

Talk to friends and family about the financial challenges that they faced as their children grew up, and ask what expenses they would have liked to have planned for.

Think through the options, and consider your overall financial plan – but above all don’t let the cost of future education create anxiety – it may make you vulnerable to investment decisions you later regret.

15/1/15  Since this post was published the Independent Schools Council of Australia (ISCA) has warned that “some school fee estimates are not representative of the vast majority of independent schools”, citing ASG 2015 estimates.

In an article in The Educator, ISCA executive director, Colette Coleman, said “While ASG admit their school fee figures ‘represent the upper ranges that parents can reasonably expect to pay,’ they neglect to show just how small a proportion of Australia’s Independent schools are actually charging the kind of fees that could contribute to those sort of cumulative costs”.  She advises parents to do their own research and check out the fees at their school of choice.


Posted in sales psychology, Uncategorized | Tagged , , | 2 Comments

When even a free extended warranty is overpriced

Consumer Action Law Centre recently warned about virtually worthless warranties that consumers sometimes purchase when taking out a loan or buying a car. [Update 2020  Australian regulator criticises sale of useless insurance and warranties.   A class action against a warranty provider McMillan Shakespeare subsidiary Davantage, is settled.]

If you have paid for a warranty, or any other type of “add-on insurance”  see how you can demand a refund.

I wrote recently about a case where the tribunal ordered a car dealer to refund the price ($14,500) paid for a used car to the consumer (‘G’).

Another part of G’s story shows how even a ‘free’ warranty can cause harm by:

  • appearing to add value to a car,
  • conditions that may add to consumer costs, and
  • giving the purchaser false confidence in the purchase.

Continue reading

Posted in Uncategorized | Tagged , , , | Leave a comment

Consumer Guarantees and Used Cars

(This is not legal advice.  There are no written reasons for the VCAT decision so I am relying on notes I took during the hearing).

A Victorian consumer recently received a full refund of the price he paid for a 4-year-old car which developed a serious problem 12 months after purchase.

This outcome is not very common, not least because there are often evidentiary issues in these cases.  However, it illustrates how the right to a refund or repair of faulty goods clearly extends to used cars – and can apply years after the end of any manufacturer’s warranty.

G bought the used Volkswagen Golf from a VW dealer in February 2014 for $14,500.  He had the car just under a year when it developed a serious problem, requiring replacement of the engine.  The quote for repair was $15,540.  Volkswagen Australia offered to pay half the cost of the part, as a ‘good will’ gesture.  However, this would have left G with a bill of $9,200.

G took his case against the VW dealer to the Victorian Civil and Administrative Tribunal (VCAT).

Consumer Guarantees

When anyone buys goods or services, those goods or services must meet certain standards called ‘guarantees’ under the Australian Consumer Law.

Both manufactures and sellers are responsible for consumer guarantees. However, consumers often believe (wrongly) that any claim they have for faulty goods must be made against the manufacturer.

It is often easier and preferable to approach sellers when claiming consumer guarantees, particularly because where there is a major fault, the seller will be obliged to provide a refund or replacement. The seller can’t refuse to honour the guarantee or insist that the consumer claim from the manufacturer.  Continue reading

Posted in Uncategorized | Tagged , , , | Leave a comment

Dodgy marketing of college courses

Over the last six months I’ve spent time on the phone with dodgy salespeople – I even had someone visit my home – to try to uncover which training college was at the bottom of misleading telemarketing calls.

The marketing of college courses is out of control and will remain so, despite some attempts at stricter guidelines and obligations on colleges to rein in their sales agents.

The industry, and government, may suggest we wait to see if recent initiatives improve the conduct of sales agents work.  However, I believe we will continue to see significant problems until all telemarketing and door-to-door selling of courses is banned, based on:

  • Sales agent problems in other industries
  • My recent experience with telemarketers selling online courses
  • The difficulty involved in monitoring the conduct of a large number of agents and enforcing current obligations on colleges.

Continue reading

Posted in Uncategorized | Tagged , , , , | Leave a comment

Has the Government put Rick Otton’s book in all the libraries?

Rick Otton and his students go to great lengths to show how “rent to buy” strategies are accepted – even supported – by Government, the Courts and the banks.

Most of these claims are probably inconsequential in their own right, but it appears that they aim to build up a picture of strategies that are ‘mainstream’ and safe.  The risk is that some people confidently put these strategies into action, and find out too late that some aspects of the practices have not been fully tested in the Courts and are open to challenge.

book in libraries

Here is just another example where Otton claims in 2013 that the Government put his book “How to Buy a House for $1″  in all libraries, and says “they appreciate progress”.   Replies to his post on Facebook include “Awesome”, “fantastic Rick, great success”, and “outstanding”.

Admittedly, the Trove service is created and maintained by the National Library (an Australian Government institution), but that is where Government involvement ends.

According to the Trove website it “provides access to more than 380 million resources” with a link to Australia including books, newspapers, journals and websites.

I probably don’t need to go any further to suggest that it would be physically impossible for Government to make a value judgement on each of the 380 million resources on Trove, which as well as Otton’s book include books supporting Scientology, Creationism, and 9/11 conspiracy theories!

Otton is correct however, in noting that his book is available to borrow from some public libraries.

Posted in Uncategorized | Tagged , , | Leave a comment

Publicity Monster finally pays up

See previous post for background.

In June 2014, the Victorian Tribunal (VCAT) waived any obligation for my friend L’s business to pay $3,030 to Publicity Monster (PMAU) and ordered PMAU to refund to L the $1,317.80 he had paid them.  Publicity Monster is part of the Search Results Group and a business name of PMAU Pty Ltd. Continue reading

Posted in Consumer issues - general | Tagged , , , | Leave a comment

When the going gets tough, the tough get …evasive?

How have prominent rent-to-buy figures responded to challenges?

facebook comment re we buy houses   The rent-to-buy industry has faced some challenges over the past few years, including negative media coverage, attention from regulators and a series of prosecutions. Continue reading

Posted in Rick Otton | Tagged , , , , , , | Leave a comment