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Under a rent-to-buy scheme, the seller makes a rental agreement with the buyer at an above market rent rate. The buyer may only exercise the ‘option to buy’ at the end of the rental period if they can get the finance to pay the balance of the agreed purchase price and have complied with the terms of the contract.
The buyer will typically pay an initial ‘option to buy’ fee as well as ongoing option fees which are separate to the rental payments. Even though the ongoing option fees are supposed to reduce the balance of the purchase price they are not likely to be secured in a trust account.
This is a high-risk scheme for buyers because their name only goes on the title of the property when they have purchased the property outright. Some rent-to-buy contracts may indicate the buyer will lose all payments made and have no claim over the property if even a single payment is not made on time.
In addition to rent payments and a fee for the option to purchase, the contracts generally require buyers to pay for costs such as repairs and maintenance, council rates and insurance.
If the seller has a mortgage over the property and fails to keep up their own repayments, their lender may have the right to repossess the property.
A rent-to-buy scheme can also be a high risk for sellers because they are effectively locked into an extended settlement period during which the property may increase in value. Sellers remain legally responsible for the property until the property title is transferred. They may be in breach of tenancy laws if they rely on contracts provided by scheme promoters and they may have to find another buyer for the property if the renters cannot or choose not to buy it after the rental period. If the seller is using the payments to cover their mortgage, they could be left vulnerable if the buyer fails to pay their rent or other fees.
Fidelity guarantee protections offered to those who buy or sell through a licensed real estate agent are not available to those who participate in rent-to-buy schemes.
At property investment seminars, spruikers often encourage seminar attendees to establish rent-to-buy contracts with people unable to get mainstream finance. Be aware it is illegal to facilitate a real estate transaction between third parties without an appropriate licence.