Rent to buy: The pitfalls in practice

Rent to buy is not a ‘new idea’, one of my mentors is a man who built over 10,000 homes in Dublin (he retired in the 70’s having started his business in the late 40’s), but in talking to him he spoke of almost exclusively selling houses in staged payments and renting them out to prospective buyers as a way of paying for the property.

The resurfacing of rent to buy is not evidence of the wheel being reinvented but purely of the prevailing economic environment, however, unlike the way it operated over thirty years ago, today renting to buy is having obligations stitched into the contract that may not be possible to meet in the future and therefore it leaves the renter/purchaser in some slight uncertainty.

One of the primary issues is that of ‘loan offers secured’. When you rent to buy you are essentially (in most cases) saying you will buy the property at a point in the future for the market value at the time of completion of the deal, for instance, in three years. However, you have no idea of what credit criteria will be at that time, it has changed so vastly in the last 6 months alone that you almost wouldn’t recognise it so who can say with any accuracy what will happen further down the line?

We get a lot of enquiries from people looking to secure loan offers for a rent to buy scheme but the main question we have is – why? You can’t keep it for three years, they don’t last forever, in fact its more like three months.

It doesn’t mean you can’t opt for rent to buy, but if you do then there are several things to consider. Firstly it will cost you over €3,600 to get started (it is €2,995 + VAT) with rent2buy and even more in some other schemes (€5,000 or up to 2% of the purchase price), this ‘deposit’ is offset against the purchase price if you proceed (basically the builder/developer/seller forgoes this portion of the profit and the rent2buy agent keeps it).

The schemes that seem to be available via this system are also those that are not actively sought on the private market, in other words – builders don’t sell via ‘try before you buy’ or ‘rent to buy’ because there is a queue of buyers, it is a way of getting a transaction on a property that otherwise probably wouldn’t shift in the current climate. If a property is property marketable and priced right it will sell in the traditional manner so there is usually some kind of issue, be it location, occupancy, or otherwise that lead to the rent to buy proposition.

With a massive oversupply in property (and of course, properties are being built still so supply is still increasing while demand is not) it means that the future prospects for property – at least residential  and acutely in the new build arena- will continue to trend down.

To a degree it is like a futures contract, but if there were a functioning market the futures price would be heavily discounted given the supply in the property market, however, in a futures contract on a property the valuation doesn’t have a functioning up to date market price indicator so you are highly likely to agree a price that favours the seller because they have more knowledge than the buyer (on build cost, comparables etc.), the fact is that the property market doesn’t function like a regular market, never has and probably never will, the information lag and lack of transparent information -at least in Ireland- ensure this.

The most singular advantage of buying today is that you can get a long term fixed rate for a really cheap price, people make a mistake in the ‘cost’ of property by only looking at the price, but if you plan to use finance to complete the sale then it is vital that you consider this, and if you buy an average home for 15k less but with an interest rate that is (for instance) 3% more then you really lose out over the life of the loan.

Rent to buy has this risk built into it because you can’t secure a mortgage, never mind a rate, when you are a renter. So while we do feel that renting to buy has a valid place in the market, and it will certainly help out a certain sector of buyer, on the whole it is a concept strewn with issues in the making.

One Comment

  1. Hi Karl,

    That blog is live on our site now! Thanks a million.
    http://www.paddypowertrader.com/blog/index.php/views-opinions/2009/05/29/zomg-a-zirp/
    We will continue to tweak it but looks good so far…

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