I had dinner in early 2008 with a man who was a retired builder, he told me about the way he used to do business back in the 70’s, and he told me ‘you wait and watch! It’ll be happening that way again!’, he was right, although at the time I didn’t realise that.
He said that back in the 70’s when people came to see his houses they’d say ‘how much is it?’, and he might say ‘£12,000’ to which they invariably said ‘we can’t afford that!’, and his approach was this – ‘what can you afford?’. He would then negotiate a deal with the buyer based on renting out the property with a view to buying or letting them have the property and paying him directly without having to go down the route of standard mortgages etc. and it worked, he was successful through the 70’s and 80’s and he retired in the mid-90’s before (as he said) ‘the real fun began’.
The point about this is that being able to work in a capital intensive business like building and developing in the 70’s and 80’s would have taken grit, mettle, and a seriously strong head for both figures and a strong business savvy. Now we are likely to see a lot of liquidation in the market and only the least leveraged and smartest builders and developers are likely to survive.
This brings us to the resurfacing of ‘Rent to Buy’ or ‘Try Before you Buy’ schemes, this is an approach which is being used to entice people into a market where the presiding sentiments are of fear and contraction. There are many people renting out of choice, and if they go for a ‘rent to buy scheme’ then they may (at some point in the future) take the option to buy.
How it actually works is the renter goes into a standard rental agreement, they pay a deposit and pay rent as does any private tenant, however, they do this while having a fixed price purchase price in the future which, if they choose to buy will be what they can purchase at, while obtaining a reduction for the rent paid up until that point.
Unlike mortgages or financial products, Rent to Buy schemes are not regulated and there are no steadfast rules surrounding how they work, each one is different.
The rents and accumulated deposits are not refundable (nor should they be, after all, you are ‘renting’), the one blindingly obvious issue would be that when it comes time to buy – should that be what you want to do – it may be hard to obtain finance because it will still require the property loan meeting LTV expectations and standard criteria, there is no criteria required for being a renter, other than the ability to pay, but are potential ‘rent to buy’ customers aware of this?
Other issues that come to mind are these – can you walk away from the deal if you don’t want to buy after the initial period? (usually this is two years). If so, is there any financial loss involved? For instance, with some rent to buy schemes there is a €3,000 fee up front, is that fee non-refundable if you don’t proceed? And if you are paying (for example €1,000 per month) rent, is it market priced rent or priced for the rent to buy contract? What I mean by this is: if you were to rent a similar property in the same area would you get it for the same or less? If it is more then the only reason for considering the rent to buy scheme would be if you well and truly believed property prices would go up in the next two years.
Why? Because otherwise you’d be as well to rent cheaper elsewhere and put your money into a savings account, the better market rent, along with the lower purchase price (if, as expected, property doesn’t actually recover in the short term) negate the virtue of ‘renting to buy’. It would be one thing if the builder was happy to carry the can and let you have the house with your rent being a mortgage, then it is a standard ownership contract, in this case the mortgage is being provided by the developer/builder, but other than that possibility renting to buy is not the panacea that it has been painted as being by many commentators, it is merely an option, a solution that matches a particular set of needs.
The other issue is this, if it seems to good to be true then it might be. One scheme has rent of €750 per month (€950 p.a.) and if you buy after 3 years the full €27,000 paid goes as a deposit against a purchase at €195,000. If after three years that property was only valued at €150,000 then what was the rationale for ‘renting to buy’? Again, much of this is predisposed on two things, firstly servicing those who can’t get a regular mortgage or who have no deposit, and secondly on property prices remaining at current levels, which bears some strangely similar angles with the market sentiment that existed in 2005!
Rent to buy is therefore, in our opinion, an option, not a ‘general solution’, and locking in prices during a down market may not be prudent, we strongly advocate people getting independent financial advice if you are considering this, we also suggest that you don’t use any firm attached to the estate agent, builder, or developer, and that you do your own research regarding the proposition. While we encourage innovation and are happy to see new ideas coming forward, prudent decisions must reign, and rent to buy does have some drawbacks that are not featuring heavily in the press they are receiving.