Saturday, 22 September 2012

Try before you Buy (Rent to Own)

So, you're currently renting and dream of owning your own home.
However, the banks have said that you have not ticked all their boxes in order to qualify for a home loan.

These bank criteria are often:
- Do not have a large enough deposit (10-20% of the house value)
- Cannot prove a regular income (self-employed or casual worker)
- Do not have a credit history
- Have a spot on the credit report

Luckily, there are other ways to obtain home ownership that do not involve applying for a bank loan and do not require that high deposit that banks require. All that is needed is the ability to meet regular weekly or monthly payments.

Rent to Own / Rent to Buy - 'Try Before You Buy'

Rent to own acts as a stepping stone between renting and owning. Homeowners can 'try before they buy' by renting the property a few years before committing to buying the property.

Essentially, it is a legally documented transaction, with the property rented and an option to purchase at an agreed price, sometime in the future.

The potential homeowner is not obligated to purchase but is given the opportunity to 'try before they buy'. They have the choice of terminating the agreement at any time and returning the property. The also have the choice of buying the property when they want.

This gives the buyer the flexibility to change their mind down the track - perhaps about the suitability of the neighborhood or the house or just a change in personal situation.

This strategy is great for people who want to get into the property market without large up-front costs and just want the chance to start owning their own home. It is also ideal for renovators who want control over the  property for a short period of time and then resell for a profit.

The best reason to enter in a rent-to-own is that you have fixed the buying price, even if it is a few years in the future. This should give you a peace of mind about rising house prices and it'll give you time to continue saving towards a deposit. At the same time, you get to live in the home in which you will eventually own.

To enter into a rent-to-own, it is often necessary to put down a non-refundable deposit. The good thing is, this deposit is significantly lower than what banks expect buyers to have. The rental amount may be higher than the rental rate in the area, but there will be no more paying dead rent. Depending on the terms of the agreement, a portion of the rent paid may be counted towards the deposit on the property.

At the end of the agreement period, you will have accumulated a deposit towards the property and the additional savings over that time. You may either buy the property and shift to a bank or request the creation of a new agreement. However, when re-creating the new agreement, the owner may revise the purchase price.

Rent-to-own is particularly good if you fail to meet the mortgage requirements of a traditional lender. By demonstrating regular payments, you create a good track record that enables you to meet at least one of their lending criteria. Credit spots could be healed and would be less of an issue over time. You get to test whether the home is to your liking and over time, will have built up a deposit that allows you to shift to a bank.

If you are looking for a rent to own home in Sydney, let me know!

Happy home owning.

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