September 7, 2010
When we like a car that’s for sale we take it for a test drive to see how it performs before making an offer. When it comes to buying a home we do our inspections and if we like what we see we present an offer. But how good would it be if you could live in the property you were interested in before buying it?
Rent-to-own is one option available for people who may like to rent a property for a specified amount of time (usually a number of years) with the objective of buying it later down the track. This way you can get a feel for the house, all of its nooks and crannies, and allow time to familiarise yourself with the location and the neighbourhood. It can also help reduce your future home loan size.
This path to home ownership may be suitable for those who might not have enough of a deposit saved up right away or it may suit those that don’t have a good credit rating but want to change it and prove they are willing, which usually takes a few years to improve.
What is the process?
Basically there are two parts to this option for home ownership – renting and buying. The rental part is the same as renting any property; you sign a tenancy agreement, pay the required bond and pay rent as agreed for an approved period of time.
The buying element is organised through a separate agreement called an option deed, or option for short. This legal document is an obligation-free agreement that basically says you have the right to purchase the property at the end of an agreed period. To secure this right, you will need to pay an up-front option fee, and then make ongoing option fee payments at the same time rent is paid for an agreed time period.
The option fees paid are then credited against the purchase price for the property and used as a deposit if you choose to go ahead and purchase the property. Keep in mind though that these fees are non-refundable if you opt to not purchase the property.
The property price is agreed to at the beginning before you sign the option deed. So if the property value increases, the person buying the property keeps any capital gain, which can be seen as a trade-off for the option fees being non-refundable.
What is the catch?
Unfortunately you can’t just find your dream home and ask to purchase it this way. You will have to find a home that is advertised as a rent-to-buy home. There are some agencies that do specialise in this type of transaction and list homes that are available to purchase this way.
Make sure that you have a solicitor who specialises in vendor finance for real estate who can check over the paperwork and contracts before you sign anything.
Trying before you buy a home, with an extended period to rent gives you the added bonus of having extra time to get your finances sorted in time for a home loan. If you decide that this option is for you or if you want to purchase property the old-fashioned way and are in the market for a mortgage, compare home loans online before making any decisions.