Understanding Rent to Buy Models

Living room 3One question that we keep getting asked is: What is rent to buy? It can confuse many people over how they can rent and buy at the same time. Often confusion starts with terminology as it can also be termed RentBuy, Rent before you Buy, Buy with Rent and a whole host other mixed up names although they are not necessarily the same thing. Not everyone has the same criteria when selling a property and some owners don’t necessarily need or want the money all in one lump sum. When the seller is happy to receive the proceeds from the sale over a longer period there are more possibilities on what can be achieved for both vendor and purchaser. Flexibility is the key thing in any type of rent to buy scenario as it can accommodate those with poor credit history until such time as they have rebuilt their financial standing. So asking what is rent to buy can bring about a far more complex answer than most people expect. In its simplest form it could be the right to buy a property after a tenant has rented it for a predetermined period, at the other end of the scale it could be a lease where the tenant has full rights to do whatever suits them with the property so they could sublet, part let, take in lodgers, sell on or any variation of these whilst overpaying a pre-set rent to pay down the capital of the purchase which again was agreed within the lease.

As with most things legal, they have to be left to the people who know and understand the complexities of the wording of the agreements. The usual method with these sorts of arrangements tend to be directly between the buyer and the seller rather than through a middleman like estate agents as the complexities of agreeing who wants what can be quite time consuming. There are companies now specializing in these types of deals but mainly for putting together the parties not working out the actual specifics of the agreement. Once the vendor and buyer are communicating a simple heads of terms agreement is usually drawn up. This is just a preamble to the legal requirements which states what each party wants to get from the deal and what each is putting into the deal. This can then go to the solicitors for each side to agree the actual wording. It is normal for the vendor’s solicitor to create the main body of the agreement for checking and alteration by the purchaser’s solicitor.
The cost of the legal fees can be borne by each side as in a traditional sale or they are often charged to the buyer upfront. They could even be added to the cost of the property to be paid down from the capital side of the repayments.

Living room 2A traditional house purchase requires the buyer to have sufficient funds to fund deposit and sufficient income with credit history to repay a loan with interest provided by a third party such as a bank or building society. These arrangements have mortgages with interest paid each year which alters after any fixed period according to the economics of the country. Rent to buy arrangements can have all the costs of long term arrangements put on the price of the property to begin with so the buyer knows exactly how much they will pay over a maximum amount of years. Whilst a typical mortgage carries from around £1.80 repayment for every £1 borrowed which is very likely to increase with interest rises, using rent to buy arrangements would have the repayment set at the beginning to something like £1.50 to every £1 in market value of the house less whatever deposit has been paid off the original price. How this helps the struggling purchaser is that they have the ability to buy without the finance administration costs, without the ridiculous credit requirements of the lending institutions and without the cumbersome overly expensive interest on the borrowings.

Like any purchase the property is theirs from day one provided they maintain all the payments and they are able to sell when it suits them. Whether we believe property doubles in value every 7, 9 or 11 years we can see that even in the worst case scenario it would have doubled in value long before the debt has been paid down so could be sold and the profit from the sale moved to a traditional purchase or used to move up to a better house. Add to this any value increased by renovation of the property and it can work out to be a solid investment for those who really want to own their own home. The difficulty or downside of these arrangements is the shortage of properties available as the vendor has to be in a position where the money is not needed in lump sums or immediately. This could be the case where the seller is moving a portfolio slowly, where the property belongs to a company, is held in trust or the owner wants regular income instead of money in the bank.
Obviously as each deal is separate it’s usually a lot more complicated than the simplified versions demonstrated here but it doesn’t need to be.

Always presume it’s a buyer’s market if you ask what is rent to buy?

Written by:
Lionel Palatine – He is a regular networker and a speaker at events as well as being a property author and adviser. He joint ventures deals and shows people how to buy property for low cost which are inclusive of all fees and deposits.

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