Do banks suggest rent-to-buy?

I have written previously about a claim about a Census question supports the legitimacy of rent-to-buy transactions. In this post I’m considering the claim that “even the banks are suggesting rent-to-buy”.

I don’t claim that ‘rent-to-buy’ transactions aren’t legal. Most of these transactions are probably within the law – although the legal status of a variety of “creative strategies” may not be settled until determined by the courts – some day. I suspect, for example, that discussion amongst operators about different types of “joint ventures”, and when a joint-venturer might require an estate agents’ licence might just be one example where the law hasn’t been fully tested. The fact that a NSW tribunal ordered that the majority of an amount paid as an option payment was rent, and was to be credited to the tenant when the agreement was terminated, also suggests that the application of our current state and federal laws to these deals is far from settled.
However, the claim I am considering here isn’t one used to support the legality of rent-to-buy, but used to indicate broader mainstream acceptance and support of rent-to-buy.

“Even the banks are suggesting rent-to-buy”

In 2012, a post appeared on the Commonwealth Bank blog about the benefits of home buyers entering into rent-to-buy agreements, as a way to “get on the property ladder”.
Continue reading

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Acceptance of rent-to-buy – the Census question

“This proves rent-to-buy is accepted!”

(Update August 2016 – In 2016 the words in the Census question were changed from “rent/buy scheme” to “shared-equity scheme” suggesting that my conclusion in this post – that the question never referred to vendor finance or lease options –  was correct).

I don’t claim that rent-to-buy is a scam, or that the models used in rent-to-buy or vendor terms are illegal – but that a lack of appropriate regulation puts buyers and, what industry calls, “motivated sellers”, at risk. You would hope that people would stop and question these unusual transactions – but understandably some in the ‘creative real estate’ industry seem to go to a lot of trouble to demonstrate how these transactions are legitimate, and widely accepted by government and the community. On their own, the claims made may seem trivial – but in combination they can give an overall impression that these deals are more prevalent and accepted than they are.  Here I start to put some of those claims to the test.

Claims used to demonstrate the legitimacy of rent-to-buy transactions include:
• A question in the census “proves rent-to-own is an accepted way of buying a home”
• “Even the banks are suggesting rent-to-buy”
• But “leading government officials regularly seek [Rick Otton’s] advice on solving the housing affordability crisis.”
• In 1927 the “legality of both forms of vendor finance was accepted by the High Court of Australia.” Continue reading

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Limitations of pre-contractual advice

See 15/3/14 addition to this post

This post focuses primarily on rent-to-buy house deals, but it also applies to some other complex or high-risk consumer contracts.

I’ve explained how some rent-to-buy deals work, and what the risks are for buyers and some sellers.  So, aren’t these problems with rent-to-buy houses the buyer’s fault if they don’t get legal advice?  ( I use the terms “buyer” and “seller” to also refer to parties in an ‘option to purchase’ contract).

Obtaining advice may be discouraged

I’m not aware of any buyers being prevented from obtaining legal advice, but selling techniques which employ trust and reciprocity and suggest scarcity and urgency may reduce the likelihood that the buyer will seek independent legal advice.   I hope to write more about these selling techniques in a later post.

Buyers may not be able to afford legal advice.

Sellers or intermediaries are aware of the buyer’s financial circumstances, and will know whether the buyer can afford to obtain legal advice once any deposit or option fee is paid.  In fact the seller or intermediary may base the fee on the total funds the buyer can obtain.

For example, on page 131 of “How to Buy a House for $1”, Rick Otton gives an example of a hypothetical conversation with a buyer, which includes this:

You:       “How much up-front money would you have to get started?”

Them:   “Around $5,000” (Click)

You:       “Up to…?” (Pause)

Them:   “$8,000” (Click)

You:       “But no more thaaaaan…?”

Them:   “Actually, we’ve got $8,200”. (Click)

Assuming the buyer must then find money for moving and other costs, it’s difficult to see how this buyer could afford to pay for independent legal advice. Continue reading

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“Rent to Buy” houses – what can go wrong?

Just google “rent to buy” and “win-win” – those phrases seem to just go together!   It just doesn’t always work out that way in reality.

This is not legal advice and the problems listed here may not be relevant to all deals.  If in doubt, please seek legal advice.  If you’re already in trouble, also see here for more advice.

Briefly, the possible downsides for buyers or sellers[1] are:

·         Rent to Buy” house deals are complex.  Borrowers are almost always unable to get a mainstream mortgage (and some investors promote schemes to people who are bankrupt,  or with ‘bad credit’).  It is no surprise that faced with payments that well exceed (sometimes double) rent payments, and obligations to pay rates and maintenance, some of these buyers get into trouble.

·         Buyers can lose tens of thousands of dollars (and sometimes their first home owners grant) within a few years if the deal falls through because they can’t maintain payments. Continue reading

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