A Robert Allen student? This wouldn't be the crooked Robert G Allen from the USA would it? Who went bankrupt in the 1990's sometime while living in Santa Fe? Loves telling people how to get rich while ripping them off? No, surely people wouldn't be so stupid as to fall for that…
I have a property in Perth that isn't selling and I thought that perhaps offering a rent to buy deal might be a way forward. Is there anyone who has had experience with rent to buy deals in WA, preferably Perth?
In WA you will need a Credit License to offer Vendor Finance Terms.
I think i would start by contacting the OSR in WA to find out what you need to do to obtain your Credit License and can then go from there.
Richard Taylor | Australia's leading private lender
Ahhhh, this has been good reading!
I hear on the grapevine how passionate some people are about the evils of vendor finance and rent to buys, but until now I've never seen or heard such things first hand!
As for Mr Jenman's complaints that rents in a rent to buy are double market rent, well derr! You're not really just renting the place, you are in control of the property, and as such you make payments closer to what mortgage payments would be. When I say mortgage payments, realise that if you need to get into a house this way, it's not really fair to compare the rate you would have to pay with the 5.09% that I'm paying for some of my houses. I was contacted by a seller a few months ago who bought their house, and their mortgage was locked in at 13% for a low doc loan with Bluestone. Do the math on that, and compare it to the payments on a rent to buy at near double rent.
I myself aquired the house I am in this very minute under a rent to buy towards the end of last year. Rent for the house would be around $300 pw, but I am paying $550 per week, with no rent credit. Given I got into the house on a very minimal deposit (less than 2%), with no need to prove my income, the fact that I am locked in for 2 years at just under 9% didn't bother me in the slightest at the time. Low doc loans at the time were closer to 10%!
In any case, I've got two years to either accumulate enough deposit to purchase the house the "normal" way, increase the value so I've got equity in it that way, or hope for the market to go up enough so that it values up another 10% and I can easily get a bank loan.
I'm prettty damn sure I'm not being taken advantage of!
Also, the seller who is on a variable rate is borrowing his money at around 5.5% at the moment, and lending it out to me at around 9% (effectively). In this credit squeeze we're in at the moment, he previously had the house vacant for around 4 months while two separate contracts fell through due to problems obtaining finance. Now he's getting $550 per week. Maybe I'm taking advantage of him?
Since interest rates have fallen so rapidly, obviously it would be in my best interests to refi tomorrow if at all possible. My payments would go from $550 pw to $350 pw overnight. Increasing the value of the house the required 10% to get enough equity to refinance should take about a month. On top of that, I can prove I've been paying $550 per week for the last 12 months… does anyone have Mr Jenman's email address so I can alert him directly of my pain??
As for any lawyer telling you to run for the hills if they know you are considering a rent to buy, I find that very interesting. As Mr Jenman is aware, these are not illegal instruments. If the lawyer is advising you against doing something that is in fact legal, then on what basis are they advising you? Surely they wouldn't be advising you based on your financial interests, as most lawyers don't actually hold a financial license. Being good lawyers, would they break the law and give you financial advice without a license?? Hmmmmmm……
Many lawyers however, will also lie and tell you this stuff is illegal. This is because they just don't understand it, and couldn't be bothered learning it. I have been told that in law school they spend about 15 minutes on this stuff at an undergraduate level. Personally, I've spent about 2000 hours on it, and I've still got no idea what's going on!
While, obviously, lawyers should be the best people to give you advice on aspects of the law, remember that they are not gods, and that no mere mortal can possibly know the entire law. There's just too much of it! Also, if you can find two lawyers who agree on everything, then one of them isn't thinking! Oh yeah, also remember that intake numbers for law school in Australia are growing and growing, and as such it's just not that hard to get in anymore. Remember that kid at school who the rest of the nerds used to take pity on because he tried hard, but just wasn't that bright? Chances are, he's your lawyer!
Anyhoo, I could go on for hours, but I am becoming less and less coherent…. (and more bitchy!)
Andrew
just a few questions.
what happens to the person renting a rent to buy, if the vendor defaults on the loan?
a renter is protected under residential tenancy guidelines, what protection/rights can the renter claim/access under these arrangements?
who pays council rates etc?
what price does the renter pay when they eventually decide to buy?good luck to those it works for. i have limited knowledge of these arrangements but occasionally see handmade type signs outside properties with a value to buy and or rent which seem way over market value.
just an obervation. regardsHey pully
Ok, somewhere on another post we've had like a three thousand word discussion on what happens if the vendor defaults and or goes bankrupt. Basically, you have some protection, but there is certainly an element of risk there. If I'm buying a house under one of these arrangements, I make the payments direct to the seller's bank so I know it's going there! However, for people who can't get a bank loan for a few years, the bigger risk is house prices doubling int he mean time.
Any of the rent/buys I've been involved with still use a normal residential lease, so both parties are still governed by the residential tenancies act, or whatever it's called where you're from. There is also another piece of paperwork that basically gives you the right to purchase the property at the price you set today within generally one to five years, depending on what the vendor and purchaser agree to.
As for rates, insurance, etc, it depends on the deal. Often it is included in the weekly payment figure.
As for the signs you see, do these have the weekly price or the total price? And what market value is it that they are above exactly? Do you mean that the weekly payments are above market rent, which is dead rent and gives you no ability to set the price of the house today? It's ridiculous to compare rent to buy rents with normal rents. It is much fairer to compare them to low doc mortgage payments. Or do you mean that the total price of the house is way above market price for the house, when market price obviously assumes that someone has all cash for the house, or can provide their own finance? The fact is, that the only market you can compare a rent to buy price to, is the rent to buy market – or possibly the wrap market, which is slightly different.
The basic premise of a rent to buy is that it is a stepping stone for someone to get into the housing market who would otherwise not be able to get there by traditional means. If you can get traditional finance, then paying the prices that are charged on a rent to buy by those who do it for a business would be a bad idea. However, if you can't get a bank loan today but would be able to in 5 years time, would you rather set the price and payments today, or wait five years and hope things haven't doubled by then?
I don't know everyone else's opinion on this one, but I would say a "fair market" price on a rent to buy is around 5-10% above full retail price for those who have all the cash today. If I was selling a house with a full market value of $300 000, my rent to buy price would probably be around the $320-325K mark. As for repayments, once you work out how much you're paying for the house, work out what the payments would be if you were getting a low-doc loan from a standard lender, and work off that being roughly fair. Again, this is my opinion, and people's opinions on these things vary wildly!
Then there is the issue of rent credit, which is how much of what you pay weekly goes towards the purchase price of the house. This is all about equity, as the more equity you have in a property the easier it is to get a loan (generally). If you can get the buyer to understand the benefits, it's often a good idea to charge a higher price for the house, and give them a higher rent credit as it builds equity faster. However, many buyers I come across just don't get that, and think they're paying more for the house (or maybe I'm just bad at explaining things!)
Anyhoo, I hope this has been enlightening for you. If you want any more info on it, then get in touch with me. I love this stuff!
Cheers,
Andrew
If you enter into a rent to buy type agreement (as the renter) you will be purchasing an option on the property – ie entering into a separate option contract. This enables you to register a caveat on the title.
If the owner stops making repayments on the loan the 1st mortgagee will start recovery action. They will have the right of sale under the mortgage agreement. so the property can be sold and they can recover their money. If you have an option this will complicate things. They will no doubt offer it to you, but what if you are not in a position to purchase at that stage?
And what if the value of the property had dropped?
I think it is a question of priorities and the first mortgage would be a high priority than the equitable interest of the option agreement.
it could be messy.
The option agreement will also cover the purchase price – whether a fixed amount or an amount to be calculated by some sort of formula.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
thanks for that info terry.
sounds potentially messy and not something i would want to be a party too.
some of the stories sound to good to be true with all due respect to those who like this form of property investing.
i think i prefer the simple traditional method.
it certainly sounds there is more to gain for the person selling the property than for the renter/purchaser?it reminds me a little of the old days of companies like radio rentals where the deal sounds good but in the long term the renter/buyer paid a huge amount fot the object, albeit a depreciating one in that example.
from an ethical perspective it does seem a bit like taking unfair advantage of people who are less fortunate and who maybe also vulnerable for one reason or another.
just my point of view, each to his own.
good luck to all.
inAhoy hoy
Well of course the traditional method is better IF you have the money or the borrowing power. If you are buying anything with cash, you have more bargaining power, and can therefore negotiate a lower price.
If you don't have the ability to come up with all the cash to buy a house, and you want to get into the property market, then these sorts of arrangements are all you've got. Unless the seller enters into the arrangement with the knowledge (or plan) that the buyer will never be able to refinance and own the home, then the seller isn't taking advantage of anyone. If the buyer doesn't work out their own situation and gets taken in by a less than savoury character with more brains than them, well I do have some sympathy for them – but chances are if they buy a $300 000 house on impulse, it's not going to be the first time they get ripped off.
Do you know what percentage of people in Australia can get a home loan at the moment? It's around 13%. That leaves 87% of people who can not buy a house the "traditional" way. I'm not sure you've thought through the implications of only 13% of Australians owning real estate. Now, if you have to save for another 5 years to accumulate a 10% deposit, or you can "buy" a house using a creative way for only 10% more than it's really worth now, then that's a decision only the buyer can make. Personally, I see it as a no-brainer. There aren't a lot of 5 year periods in the last 60 years where property hasn't gone up more than 10%.
Is Harvey Norman taking advantage of people by offering them "4 years interest free"? Harvey Norman know this is profitable for them, because a vast majority of people don't get the price paid off in the four years, and end up paying 25%+. But if you don't have the cash and want a TV……
Oh, by the way, the "traditional" way is only a relatively new thing in terms of buying and selling houses. Banks haven't always been so happy to lend money on real estate. Buying a house on terms, however, has been around for hundreds of years.
I really don't understand why people who aren't interested in creative techniques come in here and bag them.
I also find it interesting that you would stay away from the whole idea because it could become legally messy. I think if you avoided everything in life that could become legally messy, you would have an extremely boring existence.
The risks we are talking about with these sort of transactions, while very real, are very low. Certainly much lower than the risk of people getting shut out of the real estate market FOREVER because they hold off buying for another 5 years.
But hey, that's just my point of view…. (apparently you can say whatever you like with no proof whatsoever if you say it's just your point of view).
I also noticed you didn't respond to any of my queries about how these things were "way over market value".
Interesting
Very interesting topic. One of the reasons that it is such a risk in Australia is because of the concept of "buyer beware" which unfortunately predominates the whole of the RE industry here. The concept of "full disclosure" seems to be a long way off.
Vendor financing was a pretty good way to go in the USA (well, at least the only part that I knew well – California) because the buyers have as many protections as sellers. It is a really excellent way for sellers who were downsizing, and didn't need the whole amount to re-invest, to earn a much better interest rate on the proceeds of the sale of the house. Of course it only works well if the sellers who do the "seller carry back" as it's called, are the only mortgage holders. They'd be mugs to hold a junior lien, or second mortgage behind a bank.
I didn't notice that prices were any higher for houses offering vendor financing, and buyers are protected from exorbitant interest rates by law. That is, a seller can't ask for any more than 10% interest rate (last time I looked) capped by the Attorney-General's office.
Just giving another perspective…
it is great to be able to discuss aspects of property investing. i think it is a good opportunity for people to do that on this forum. we are all different but opinions can be expressed.
we are not all going to agree but that is ok too. if rent to buy works for you good but there is no harm in exploring and discussing points of view. in the uk this concept has had mixed outcomes, not familiar with us.
another thing to consider is that the idea of everyone having the opportunity to buy/own their home is flawed.
but that is another story.i think i would be more comfortable with the concept if it was mandatory for consumers to get independent legal advice prior to entering into a contract to rent to buy, where all aspects are clearly explained and all options considered. probably also financial counselling would also assist but i do not think that will happen.
sadly people do not get good advice before acting and potentially the outcome is not good.
for investers it is business/cashflow/capital gain/loss. for consumers it is often the biggest expense of their lives.
not to be taken lightly.have not seen the hand made signs outside homes for awhile advertising purchasing for a value over market or offering a rental value that is laughable. usually only a mobile phone number is on the sign. i am sometimes tempted to write on the sign a more realistic value but think that would be inappropriate.
if people are finding renting/buying expensive how can they afford these inflated prices? and would there?
it seems it is the idea that by doing so they will gain equity and own the property?
but from what some have said on here that is a false belief because it is a residential tenancy agreement?too clever for me. i will stick to what i know. good luck and regards.
i amfthe
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