However high property prices in many areas and in many cases due to other debts, they cannot afford to buy a suitable property to live in. Their salary may be too low to cover the mortgage repayments each month, or they are not able to afford to save enough to pay the required deposit and other property buying costs such as building and valuation surveys and legal and finance fees.
Rent to buy is a new form of renting, now available in the U.K. that is widely used in other countries such as Australia, New Zealand and America. This enables prospective buyers of a property to take a tenancy on the property, live in the home and start to save towards purchasing it in an agreed number of years in the future at an agreed buying price. This can be the first rung on the ladder without actually buying their home straight away. It is called a lease purchase option.
The arrangement may be attractive to a buy-to-let landlord that wants long-term, reliable tenants who will look after and possibly improve the property with an agreement to sell it to the tenants in between two and five years time.
The types of property that can use this scheme vary wildly and in some circumstances someone who is unable to buy a specific property in their own name today, may ask a property investment company to buy a particular home on their behalf and set up a rent to buy scheme so that they can own it in the future.
Moreover, the tenant would avoid the stress of buying a property on the open market, such as failing chains, uncertain valuations, Energy rating criteria and the spiralling costs of moving house. The prospect of becoming the owner of the house offers a feel good factor of stability.
The lease option contract typically lasts five to six years. The rent over the period is agreed in advance, though it may rise due to agreed cost of living or inflation percentages year by year. The tenant takes responsibility for some or all of the repairs and maintenance on the property, as they have a vested interest in its condition for when they finally buy it.
The lease option contract gives the tenant the right, but not the obligation, to buy the property at an agreed price in the future. For example, a new tenant who moves into a flat worth £250,000 in October 2009 may be given the option of buying it for £275,000 in October 2015. This may have certain provisos attached to protect each party depending upon the growth in the price of flats in the area and also the property market generally.
For tenants, a lease option offers some insurance against property prices moving even further out of reach. In the above example, the tenant would be able to buy the property for £275,000 even if soaring house prices brought its market value up to £310,000. In the five years of paying rent, the tenant could put extra money to one side to save for the required deposit when buying the property, and knowing the price would make financial planning easier.
Moreover, the tenant would avoids stress of buying a property on the open market, such as failing chains, uncertain valuations, Energy rating criteria and the spiralling costs of moving house. The prospect of becoming the owner of the house offers a feel good factor of stability.
The option, however, is only valuable if prices have risen – if prices fall, the tenant will have lost out as an option deposit is required at the start of the lease option agreement that would normally be taken into consideration once the property is purchased by the optionee. A lease option also requires the tenant to stay in the same property for several years to take advantage of the option, so this would not be a suitable route unless you are sure you want to stay put. Even if the values have fallen it may be possible to renegotiate the option agreement or if you have sufficient funding decide to purchase at the original option price taking a view that prices will recover enough to cover your investment.
Lease options are attractive to landlords because they give the tenant an incentive to look after the property and to stay for several years, thus avoiding costly “voids” when the property is empty. The price the landlord pays is sacrificing some of the potential gains from a rapid rise in the property’s value.
First-time buyers are already being targeted by many of the major house developers in the UK. We are already doing this through a combination of buying suitable properties and marketing them as lease options to prospective purchasers. We are also inviting prospective tenants to find properties they would like to live in, which we could then buy on their behalf, rent to them with an agreed option exercise date.
Rent to Buy offers a number of different variations on the lease option model. The tenant may be responsible for all maintenance costs and have the right to buy the property from the landlord after five or six years.
The tenant could receive a 5 per cent rebate on any increase in the property value for every year of tenancy, up to a maximum of say 30 per cent (compounded) after six years.
Suppose a lessee moves into a property worth £125,000. After three years at 5% per year, its value has risen by £20,000 to £145,000. The tenant has earned an 15 per cent rebate on the £20,000 rise in value, so he can buy the property for £142,000 – i.e. £3,000 less than its market value.
- The tenant purchaser is granted a normal tenancy agreement that is tied in to an option to purchase the rented property within an agreed timescale and for a pre-determined value.
- A rental amount that may be slightly more relative to the local renting value will be determined at the start of the period to help establish the future credit worthiness of the tenant buyers.
- There will be an initial deposit required which may be at least £3000 and possibly 3% to 5% of the purchase value. This will be used towards the future purchase deposit for mortgage purposes.
- There will be a range of credit, banking, utility bill, employer, tenancy and character reference checks made to establish the suitability of the tenant buyer(s).
- The option on each side can be as flexible as required to ensure that all parties involved have a deal that is acceptable to their property needs both financially, practically and emotionally.
- The buying price will be determined at the time of negotiating the option.
For tenants, a lease option offers some insurance against property prices moving even further out of reach in a rising market.
In the current falling market the tenant could put extra money to one side to save for the required deposit when buying the property, and knowing the agreed purchase price would make financial planning over a five year period easier.
There is a certain amount of needing to look forward at historic property cycles and value changes in order to see the advantages. Even if a property's value falls below the agreed buying price a view of a future recovery in the market and the intention that this is the right property for someone's long term residence can still make financial sense.
This is still a very new concept in the U.K. housing market and is only slowly catching on. As it becomes more accepted there will be an ever growing number of people who may find this a great way forward to owning a property that they want but could not afford to buy in the short or even possibly the long term depending upon the state of the property market.
You've read this far, so I suspect that you are interested in finding out a bit more. As a thank you for visiting our Rent to Buy site we'd like to send you a FREE copy
of Our Special Report
"How to Rent To Buy Your Dream Home" (£29.95 Value)
Just tell us where to send it!
There's no obligation and we do not send out spam.
Before any property is let to a new tenant by a landlord it needs to have an Energy Performance Certificate to show how well the property is insulated and also to highlight areas where the energy efficiency could be improved to save heating and other fuel costs. Obviously therefore the better the energy rating of the property that you are about to rent the lower your utility bills should be.
You will hear this called "Rent to Buy", "Rental Purchase Option" "Lease Purchase Option" or "Rent to Purchase", "Try before you Buy" and is a great way to work towards owning your home.
View Current Rent To Buy Properties Here
If this would be of interest to you please contact us by using our Rent 2 Buy enquiry form
