Rent to Buy…. good or bad?

by Readers Question

11:10 AM, 15th April 2014
About 7 years ago

Rent to Buy…. good or bad?

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Rent to Buy…. good or bad?

Rent to Buy.... good or bad?I am trying to sell a rental property and have been approached by someone offering me full market value with a ‘delay’ in purchasing/completion.

Meanwhile they will cover all mortgage and insurance payments until completion.

I am sceptical…should I be?

Thanks

Maria

Comments

Mark Alexander

11:35 AM, 15th April 2014
About 7 years ago

Hi Maria

If the property increases in value and the tenant subsequently completes the purchase who benefits from this?

If the property falls in value how can the tenant be compelled to complete the purchase? They could simply declare bankruptcy or worse still wait for you to pay to make them bankrupt!

Who carries the ultimate risk if the tenant/purchaser defaults on the rent or trashes the property?

Given the additional risks will your tenant be paying significantly more than market rent and a much larger deposit than normal?

Even if you manage to resolve the above, will your mortgage lender consent to the arrangement? I very much doubt it!

I think you have every reason to be sceptical.

Why wouldn't you just rent the property conventionally at market value and sell it on the open market and at the market value at a time which is best suited to you?
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Alex Chard

11:43 AM, 15th April 2014
About 7 years ago

Hi Maria

There's a lot of this about at the moment.

Depending on what you've been offered exactly, this person will pay your mortgage, while collecting the rent. This means they make some money without actually having to buy the property.

If you just want to get rid of the property, and are not in a rush for the money, it may suit you to do this, as you'll get the asking price with no hassle.

If you do decide to go ahead with this, be sure to get some very good legal advice, as the contracts need to be watertight for both you and the purchaser, and there are some less than scrupulous people out there.

Peter Hindley

12:30 PM, 15th April 2014
About 7 years ago

I'm a bit confused. Maria mentions "a ‘delay’ in purchasing/completion". So is this a Lease Option deal i.e. delayed purchase, or an Exchange with delayed Completion?

In my view some of the risks are different depending on which it is.

Maria O'Neill

13:00 PM, 15th April 2014
About 7 years ago

Reply to the comment left by "Peter Hindley" at "15/04/2014 - 12:30":

The offer was to 'buy' the property at market value now and delay actual purchase for up to 5 years. They would cover expenses i.e. mortgage and insurance until actual completion and presumably let it to either the prospective buyers until they are in a position to complete

Peter Hindley

13:09 PM, 15th April 2014
About 7 years ago

Thanks Maria. Sounds like a Lease Option. This gives them the option to buy but not the obligation. Downside for you is that they can walk away if the market is not in their favour & you are back to square one. Doesn't mean it is a bad deal though as it depends on your needs & circumstances.

If you do go ahead, as others have said, make sure the legals suit your needs. For example, if your 3 bed is turned into 5 letting rooms then who pays to restore it if necessary.

Mark Alexander

13:47 PM, 15th April 2014
About 7 years ago

Maria

I disagree with Peter Hindley, I think what you have described sound more like a long term exchange deal.

I spent quite a lot of time with Mark Smith (Barrister-At-Law) last week and funnily enough we got talking about deals like this. I have never been a fan of deferred purchase contracts, lease options and the various hybrid arrangements and neither has Mark. However, he did say that he had been instructed previously to produce a whole suite of documentation in this regard by another client. It may be worth you making contact with him. He does offer a free initial 15 minute telephone consultation too - here's a link to his member profile >>> http://www.property118.com/member/?id=1945

This is not an endorsement. I remain very sceptical of this type of arrangement. I've only mentioned this because if you are going to do it you might as well do it right and at least take professional advice. It doesn't get better than doing direct to a barrister.
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Don Holmes

14:06 PM, 15th April 2014
About 7 years ago

Hi Maria I agree it sounds like a "lease option" that is where you agree to sell the property at today's price, held for the lease period, the proposer then takes control of your property for a period of time usually 5 years during which time they can sub let to other people and at the end of which they sell at the increased price and keep the balance.
This is not necessarily a bad thing if you need the costs covering and not keen to sell, but do take Mark A's advise and seek professional legal opinion and of course make sure, which a lot of players in this market don't do, is carry out your due diligence on the proposer because as Mark said in the beginning they can walk away.

Finally what I would also say is why in a rising market would you want to do this deal? If it is cost covering there are agents who offer Rent Guarantees without the complication of the lease. Good Luck

Mark Smith (Barrister-At-Law)

14:17 PM, 15th April 2014
About 7 years ago

Maria,

If you do intend to go ahead with either type of deal please feel free to make contact with me. I have spent a considerable time drafting contracts from scratch for both scenarios, and I will ensure you are fully protected.

My view is that what you are describing is exchange with delayed completion, which is slightly safer.

Stephen Lesley

16:45 PM, 15th April 2014
About 7 years ago

Hi There,

Some chap offered something like this to me and in my thinking made no sense then, makes no sense now. I'm now renting to a man who may want to purchase it in a few years time and if I want to sell will give him first refusal; we will negotiate then at market price and split estate agent fees. My thoughts are my tenant could have been the tenant of the chap who offered me the deal.

Maybe I've missed something.

Mark Alexander

17:46 PM, 15th April 2014
About 7 years ago

Reply to the comment left by "Mark Smith (Barrister-At-Law)" at "15/04/2014 - 14:17":

Hi Mark

How does a deferred completion deal typically work in practice please?

Would the buyer pay the typical 10% deposit on exchange of contracts and if so would the owner get that money immediately?

What if the owner then had the property repossessed and declared bankruptcy?

What would happen if the owner or buyer died, would the contracts be transferable?

What rights would the person who exchanged contracts have to occupy or sublet the property and would those rights cease if the contract was defaulted upon in any way?

In the phase between exchange and completion would the buyer have the same rights as a tenant or would their rights be completely different and if so how?

Sorry for all the questions, I'm just trying to get my head around how these deals might work. I'm sure I will also have a lot more questions.

At this stage my interest is intrigue only as I'm not planning to sell anything at the moment. Therefore, please don't consider me as a potential customer. However, there will be others reading this thread who might be potential customers for you.

If you are too busy to respond fully I will of course understand and respect that.
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