The use of property options continues to grow in popularity.
Property options are a form of property vendor finance which, up until that last few years, has been predominately used by large scale property developers to obtain the right to buy a property before a set future date for an agreed price.
During the time between the agreement and the cut off date, they push the development application through and purchase the property.
However, smaller scale investors can also use property options but in a slightly different way.
This is what is known as a “rent to buy” arrangement.
Potential purchasers would generally pay an agreed amount over and above market rent. These additional funds go towards forming their deposit for the property. During the period of renting, the property remains in the name of the vendor but the renter is always working towards owning the property.
The vendor and ultimate purchaser will reach an agreement and set an agreed future purchase price and expiry date for the deal. These arrangements give the purchaser the option to purchase the property any time before the expiry date.
If they decide to exit the arrangement and not proceed with the sale, the vendor keeps the additional funds and the rent.
It is well accepted that property price growth is outpacing our ability to save.
This is one reason why the rent to buy option continues to grow in popularity.
Investors themselves can put down as little as 2% of the property’s value and build up their ownership stake.
Self-employed investors as well as those people who have recently relocated to Australia are increasingly taking advantage of these arrangements.
Investors who like to add value to properties through renovations could also benefit from the rent to buy option.
This enables them to cut out any intermediary such as a bank and add value without involving up-front loans and large deposits. Their cash can instead be used to fund the renovation.
Traditionally the renovators live in the house for a few months, renovate, add value and then buy the property from the vendor at the agreed price before on-selling it at its new market value.
Admittedly, novice investors can see this method of property acquisition as overly complicated, but if you have a good solicitor the process doesn’t have to be overwhelming.
Also, the agreement is an option not an obligation so once the rent to buy agreement expires, the renter doesn’t have to go through with the purchase.
It is important that the rent to buy agreement not last beyond a few years. Purchasers should work towards building up their deposit on the property as quickly as possible and then become the owner.
Also, with the new credit reporting regime that started on 12th March, more people are using these arrangements to improve their borrowing capacity.
Up until now, credit records have only contained the negative things i.e. if you have defaulted for sixty (60) days or more or if you have had a whole lot of loan applications etc.
Under the new changes, financial lending institutions will now be interested in your credit history for the past two (2) years.
Utilising the rent to buy option will allow you to build up a great payment history which can then be taken into account by the lender when you eventually move to purchase the property outright.
If you have any questions regarding rent to buy agreements and their tax treatment, please contact Ellingsen Partners.