Consumer Affairs Victoria taking charge against “high-risk” rent to buy schemes

Rent to buy schemes, also known as vendor financing, have received some bad press over the past year – and it seems that their run isn’t up.

Consumer Affairs Victoria has promoted tweets, warning that property buyers should be wary of “high risk” property investments, including rent to buy.

Warning against property spruikers in the same link, rent to buy schemes are targeted. It notes that this variation of vendor sales targets lower income earners, or “prospective property buyers unable to obtain mainstream finance”.

It warns that buyers have limited legal rights if the arrangement goes wrong.

Under a rent-to-buy scheme, the buyer enters into a rental agreement with the vendor where they are charged high rent (well above market rate). At the end of the rental period they may buy the property but ownership of the property does not pass to the buyer until they exercise the ‘option to purchase’ after the rental period has expired.

Those who clicked on their promoted tweets would have seen the following:

The risks for buyers

• Rent-to-buy contracts are high-risk schemes for buyers because the title of the property is not transferred to them until they have purchased the property outright.
  
  
• You will likely be paying significantly above market rate rent and will not have any equity in the property until the full purchase price is paid.
  
  
• The rental period may last several years and, if your circumstances change, you may be unable to complete the payments. Therefore, if you pay almost the full purchase price but do not complete the payments, you won’t get your money back and will not have any claim over the property.
  
  
• Even if you complete the rental payments, you may still not obtain a home loan and lose not only the property, but also all of money you have spent.
  
  
• Be aware that if you use your first home buyers grant to buy a property, you will lose the right to apply it to any future property transactions.
  
  
• Some rent-to-buy contracts may indicate that you will lose all payments made and have no claim over the property, if you fail to make even a single payment on time.
  
  
• In addition to rent payments and an option fee (for the option of purchasing), some contracts generally require you to pay for repairs and maintenance, council rates, insurance and other outgoings.
  
  
• Potential buyers should be aware that these costs may be substantial, particularly with an older or run down property.
  
  
• If the vendor has a mortgage over the property and fails to keep up their own repayments, their lender may have the right to repossess the property.

Source: Consumer Affairs Victoria

Vendors must be aware that they must:

• Abide by the rent-to-buy contract and be unable to sell the property to the another buyer (perhaps offering a higher price) while the contract is in force, even if you need to liquidate your assets due to a change in circumstances.
  
  
• Be effectively locked into a long-term settlement period where the purchase price is fixed and you will lose any right to future capital growth if the property’s value increases over that time.
  
  
• Remain legally responsible for the property until the buyer makes the final payment and the property title is transferred.

Source: Consumer Affairs Victoria

They also warn that if you are using the rent to cover the mortgage then you will be left vulnerable if the buyer fails to pay, and the renters may choose not to buy the property mid-way through the rent to buy process.

As an example of what can happen, on one instance in 2011, tenants sold a vendor’s pool in a rent to buy swindle.

Western Australia’s Consumer Protection has been particularly bullish against rent to buy schemes. For one company, the Supreme Court ruled that one operator was illegally functioning as the owners were not licensed estate agents and also misled those who signed up – this was in the case of No Loan Home Pty Ltd in June 2012.

In another publicised situation, a WA rent to buy property scheme saw vendors taking a signed David Beckham jersey and a Franklin Mint Edition Monopoly Board in lieu of a deposit.

Property Observer followed what caused a young brother-and-sister duo to be led from a rent to buy seminar to being fined in the Supreme Court of Western Australia for their property dealings.