Rent to Buy

Hi Intrigue.
I actually draft Option Agreements (or Rent to Buy) for clients so, if you send me an email I'll send you alot more info than I could post here for you right now. But here's a taste:
You can apply an Lease/Option to Buy contract into place for just about any residentail property.
Over simplifying the process, the Vendor or a Buying Agent finds a Purchaser who agrees to buy the property at an agreed price in todays money at a date further down the track, i.e. H&L worth $500K. The Vendor agrees to sell to the purchaser the property in 5 years time for say $550K. The Vendor draws up 2 main docs – a contract to purchase and a lease agreement. So, for the next five years, the tenant agrees to pay an agreed amount for rent plus outgoings, and usually has a percentage of the rent taken off the final purchase the longer they rent the property. The purchaser also usually pays a deposit (consideration under contract law) of upwards of $10K – the more the better for the Vendor because it makes it more difficult for the Purchaser to just walk away. The deposit is always non-refundable.
Option Agreements, if done legally correct and are drafted honorably between both the Vendor and Purchaser, can be very good. They allow the Vendor to have their mortgage commitments met by the rent and they will still walk away with a tidy lump sum at the end of the contract term – good for Vendors in financial strife. It allows a Purchaser to commence buying a home without the need of a traditional bank loan – this is also why most Option Agreements i've ever done are for 5 years – because if the Purchaser has a bad credit history, after 5 years they usually have a 'clean slate'. The Purchser's rent money is not dead money because a percentage of the rent is coming off the final purchase price at the end of the Option term. The only real big downside to the Purchaser is if they simply cannot get the home loan at the end to finalise the Option Agreement. If this happens, or the Purchaser defaults on the Option Contract, they lose the lot – ALL the money they paid in deposit and rent and the property itself! The downside for the Vendor in all this is, if the capital growth in the property is high then they are literally doing themselves out of potentially tens or hundreds of thousands of dollars. Confused?

Hi Bardon.
You don't see too many but I have done an Option Agreement on a $23.3million property before – the largest I've done.

Drop me a line below Bardon and i'd be happy to talk more to you privately and with legal priviledge.

Hi Intrigue

You couldn't get a better description of Rent To Owns (Lease/Options) than Anthony's above.  However I think your friend may have really been asking you to look at the Vendor Finance angle, as a Rent To Own is one of the available Vendor Finance strategies.

The three most popular Vendor Finance strategies are:
1.  Rent To Own.  This is documented with a Residential Lease and an Option (see Anthony's post above)
2.  Deposit Finance.  This is often documented with a second mortgage.  This is where the Buyer gets a traditional loan for the property and the Vendor finances the remainder.  This strategy has become quite difficult to use due to traditional lenders tightening their rules since the GFC and the new National Credit Code.
3.  Instalment Contract.  Sometimes called Vendor Finance and at other times, a Wrap.  See the links below to see how these operate.

We've been operating in the Vendor Finance industry since 2003 and it's worked for us.  If you'd like to learn more about vendor finance in Australia, I suggest you do a search for Vendor Finance here and in the Somersoft forum.  You'll get an immense amount of reading material in both these forums.

A few web resources that may help in your search for information about vendor finance are:
https://www.propertyinvesting.com/strategies/wraps
https://www.propertyinvesting.com/strategies/lease-options
http://www.jvpropertypartners.com.au/index.php?option=com_content&view=article&id=50&Itemid=75
http://www.vendorfinancelawyer.com.au/
http://www.vendorfinance.asn.au/   The Vendor Finance Association of Australia

Cheers,  Paul