We are finding that due to the current financial banking problems that many potential property buyers are viewing this as a way forward ready for the future lending improvements in 5 or 6 years time. Many people who rent the property they live in do not always do so out of choice. The monthly rent payment is viewed as money that brings no long-term benefits to them. They would rather own their home and pay their own house mortgage rather than pay money into a property landlord's pocket.
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 before owning a home. You could say it's like taking a car on a test drive that lasts a few years before you buy it! Try before you buy is now available in the U.K. Rent to buy is widely used in other countries such as America, Australia and New Zealand. 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 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.
The lease option contract typically lasts three to six years though it may be longer. 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 March 2010 may be given the option of buying it for £275,000 in March 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. It is sometimes agreed that the tenant buyer pays a monthly premium sum to the landlord of say £100 or £150 a month separate from the rent, and the landlord may agree to match that sum themselves to go towards the tenants mortgage deposit when purchasing the property. Knowing the buying price would make the tenant buyer's financial planning easier.
Moreover, the property tenant would avoid stress of buying a property on the open market, such as failing selling and buying chains, uncertain house valuations, Energy rating criteria and the spiralling costs of moving home. The prospect of becoming the owner of the house offers a feel good factor of family stability and long-term interest in improving or maintaining the condition and facilities in the property.
The purchase option, is valuable, as when property prices have risen, the tenant buyer will historically have gained more equity in the increased value of the property. An option deposit is required at the start of the lease option agreement.
A property purchase lease option expects that the tenant buyer is to stay in the same property for several years to take advantage of the option. This may not be a suitable route unless you are sure you want to stay put. However it may be possible for you to be granted a financial interest in the future selling value of the property if you need to move on before you have been able to purchase it. You could exercise your option to buy at an earlier date if the financial situation works for you.
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 property values will recover enough in the future to cover your financial investment.
Lease options are attractive to property owners and landlords because they give the tenant an incentive to look after the property and to stay for several years, thus avoiding financially costly “voids” and marketing costs when the property becomes empty between tenancies as short term tenants move on. The price the landlord pays is sacrificing some of the potential investment gains from a rapid or long term 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 or lease with a purchase option 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 three to 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.
This is one possible scenario: -
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.
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.
Before your 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.
You will hear this called "Rent to Buy" or "Rent to Purchase" and is a great way to work towards owning your home.
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