Rent to Own

[Xav]

The beautiful thing about VF is that the limits to how a transaction is put together really are only confined by the individual’s ability to think laterally.

Just a word of caution around this, the Commerce Commission has formed the view that rent to buy arrangements (and vendor finance) are Credit Contracts as defined in the Credit Contracts and Consumer Finance Act and that some of them are Consumer Credit Contracts as defined in that same Act (that is not to say I agree with their view if you were to structure it as above). That being the case, it would be prudent to confine how you put together a transaction to ensure you comply with that Act.

LL, you would need to take advice but as you do not usually do this type of thing it is likely that the Commerce Commission would not consider it to be Consumer Credit Contract but merely a Credit Contract, in which case the main thing you need to be sure of is that the contract is not "oppressive, harsh, unjustly burdensome, unconscionable, or in breach of reasonable standards of commercial practice".

[donna]

And if they can't raise ALL of the mortgage needed, perhaps you could leave in a 2nd mortgage....at an appropriate interest rate

I know someone who did this 2nd mortgage thing and lost all their equity which was their retirement fund. They bought the property 30 odd years ago then thought it a good idea to sell - but found it hard to sell (it was worth over $1m) - so eventually they did sell the property but to a 'not ideal' purchaser - who didn't have a deposit and could only get half the property's value in a loan (my guess is the person was a high income earner with no assets). So they left their equity in the property (a few hundred thousand $$) and the new buyers got a loan from a bank for the rest. Essentially it was 100 percent mortgaged. Low and behold the person defaulted on repayments to the bank - and the bank called in the loan - then sold the property as a mortgagee sale - it raised just the bank's contribution - and all equity that was left in the property as a 2nd mortgage was gone. 30 years of hard slog - gone.

cheers,

Donna

[Wayne]

After three years the tenant has a deposit of $30,000 (10%), assuming that 100% of the option fee is applied as deposit. If the property has increased in value then that could also help the tenant in getting finance (although the reverse obviously also applies).

Actually the vendor has the money and hopefully the tenant will get it.

I talked to a person a few years ago who did these and they hoped that the tenant wouldn't be able to exercise the option as they would then get to keep the cash - it worried me greatly!

[500million]

[QUOTEThat being the case, Ivan, it makes me wonder why any tenant would enter into such an arrangement. ?[/QUOTE]

You know that’s a statement that raises it head often, particularly with mortgage brokers, and Lawyers.
Human nature is a funny thing. Without walking in another person’s shoes it never easy to say why people do things or what their motivation is.
The one thing we can be sure of is that people don’t necessarily do what others may expect.
We often extrapolate our own experiences and conditioning on to other people and we believe that the way we do things and behave and think is the way others should as well.
Most of instinctively understand that we are all different yet we still want other people to behave as we do.
There are many reasons why people enter into rent to own transactions and usually it revolves around lack of something in their lives in one form or another at that point in time and not necessarily because they are a high risk.
Most of the commentary I have bothered to look at over the years tends to focus on one thing and that is that prospective R2O tenants must be high risk to even want to consider entering in to this type of transaction. Because otherwise why wouldn’t they just get a loan from the bank.
Because someone does not tick all the boxes with the bank it doesn’t mean they not worthy.
Other reasons other than just money, that people are outside the banking system; Divorce and relationship splits, New business and insufficient books, accumulation of assets off the books,
Cash businesses such as prostitutes and many more
Talk to any R2O tenant that is succeeding and you will get the same storey and that is they are just so happy to have the opportunity to own and get onto the property ladder.
For them it’s always about a future for their family, security and stability and a legacy.
Residential property is about emotion for most and numbers for a few.

[spaceman]

One trap that seemed to catch a few people out, is that some of the Vendors claimed that they could contract out of the RTA

This particularly seemed to apply to maintenance ie: the potential purchaser was required to do all maintenance and after all why wouldn't they as they now "own' the place.

Problem with that was is the RTA specifically says you can't contract out of the RTA .....of course some people claimed to know better

When rent-to-buy was a bit more of a "thing" a few years back there seemed to be a few horror stories along those lines, where the contract/rent to buy agreement said one thing and the law of the land said another.

I couldn't see the TT ruling against you if you want to get them out in order to sell.......but if you give a reason and they're clever enough to claim you're breaching their human rights you could be stuck with them for years......DON"T GIVE A REASON, just give notice.

I agree with essence, in that I'd keep it if i could.....I see now as a time to be buying not selling.

Good luck

Cheers
Spaceman

[TheLiberalLeft]

Yeah, I've heard enough to think that RTB is a bloody dopey idea. Far too many fish hooks in there.

My story is that it's a place I want to sell to fund the build of a new holiday home, which is so opposed to the principles of property investing it's not funny (sell an income-producing asset to create a non-income producer). In my defence it was a totally emotional purchase. Perhaps I'll let the new place out as a rental. Or, shock, horror, I'll get a mortgage to fund the build.

I hate being in debt.

[500million]

I know someone who did this 2nd mortgage thing and lost all their equity which was their retirement fund. They bought the property 30 odd years ago then thought it a good idea to sell - but found it hard to sell (it was worth over $1m) - so eventually they did sell the property but to a 'not ideal' purchaser - who didn't have a deposit and could only get half the property's value in a loan (my guess is the person was a high income earner with no assets). So they left their equity in the property (a few hundred thousand $$) and the new buyers got a loan from a bank for the rest. Essentially it was 100 percent mortgaged. Low and behold the person defaulted on repayments to the bank - and the bank called in the loan - then sold the property as a mortgagee sale - it raised just the bank's contribution - and all equity that was left in the property as a 2nd mortgage was gone. 30 years of hard slog - gone.

I find this incredibly sad for a number of reasons.
For the fact the owners lost a portion of their investment and I am thinking that it may have been part of a retirement.
For the fact that whoever set this transactions up failed to put in place control mechanisms and strong management systems.
It sounds to me very much like the wrong vehicle was used and that the appropriate checks were not done.
I suspect there is much more to this storey than has been conveyed here. But never the less it doesn’t change the essence or the impact of the storey.
I read a lot about people saying to other people to go and get legal advice about most things property and I happen to agree with that in most circumstances.
I also happen to agree with the saying that not all lawyers are good lawyers or really know a lot about VF and its variations or protections. A lot just can’t be bothered or property is just not there thing beyond simple conveyancing, we want to believe otherwise and often do, to our own detriment. I have seen some very shoddy work and I have also seen some amazing work from Lawyers.
Having multiple lawyers who are highly skilled in the respective fields is advisable.
I just settled out a 2^nd mortgage with a seller recently which had a terrific out come for both of us.
not to mention a good relationship for the future.
The most Valuable deals that I have done since I started in property in the in the early 90s always had an element of VF, 2^nd mortgages and delayed settlements.
So to hear such a sad storey is heart wrenching when there really is no need for such an outcome.

[Ivan McIntosh]

If there isn't enough equity/other security, and you can't either (a) buy the property back or (b) buy out the 1st mortgage so as to stop the iniquitous tendency of 1st mortgagees to sell for no more than their money back, then such an outcome is inevitable.

That's the rub in terms of people losing their money....they fund a 100% purchase without taking any real security. Anything over 80% should really just be viewed as unsecured, because penalty interest and costs plus the price stigma of a mortgagee sale mean the first mortgagee will swallow the lot, every time.

More and real security is required, plus the financial ability to buy out the 1st mgee if required, plus some kind of notice mechanism (if you can get it...fairly rare) where the 1st notifies the 2nd that the mortgagor is behind on their payments.

[essence]

My story is that it's a place I want to sell to fund the build of a new holiday home, which is so opposed to the principles of property investing it's not funny (sell an income-producing asset to create a non-income producer). In my defence it was a totally emotional purchase. Perhaps I'll let the new place out as a rental. Or, shock, horror, I'll get a mortgage to fund the build.

Hi TLL

Having just been through this exercise (just in case anyone had noticed my lack of input last year!), I agree it seems an anathema to sell a perfectly functioning rental to build a non-producing holiday home.

Given the historically low interest rates and the lack of work for tradies, is now not a great time to build?? It will take quite a while to get house plans, council permission, colour schemes (believe me this is the hardest job of all!) sorted.

How about looking at the situation quite dispassionately.

1 Sell the rental. Great, gives you flexibility/time to work out what you want to build with less worry about servicing a mortgage during the building. When you've finished, you'll have a lovely holiday home, no (little?) debt and somewhere for the families to enjoy holidays.

2 Don't sell the rental. You've still got to work out what you want to build and service the Council fees etc from earned income. This could be stressful in itself.

Worst case scenario, let's assume this property will be fully mortgaged. Given your financial situation, would the Banks give you money? Would these costs be punitive to your living standards?? Are you doing the build yourself? Or are you hiring contractors? (Rhetorical questions) With the best of intentions, IMHO, one needs to be on-site or at minimum on-call, for the contractors. Little things do crop up that need immediate answers.

Believe me, building a holiday home is an extremely stress situation. Suppliers do short-deliver, wrong deliver, don't deliver! goods when they're needed.

Make sure that your plans are sorted down to the finest detail ie number of lights and hot-points in the rooms, access to/from site and building, number of showers.

If you think you MAY need something in the plans, get it on the plans first. You can add to the plans later but it will cost you. That's where the buildings/designers make their money. They will only supply just enough to make the house acceptable, not necessarily how you wish to live. Those are two very important differences.

You can always rent the property out through Holiday Homes, Book-A-Bach etc. There's nothing to stop you using your holiday home when you want. Remember that.

Yes, it is hard to build something that you want and then rent it out. But is it going to make your life easier? Is it going to sit vacant for months while you don't use it? If so, why not rent it out?

I hate being in debt.

Absolutely agree. But sometimes in life we have to make hard decisions to get what we want.

Don't waffle. Make a decision and stick to it. No good looking backwards and say "Oh, I made the wrong decision". No, you've made the decision, make it work.

[cube]

I don't think the RTA prevents the tenant from doing maintenance if they so wish.

[spaceman]

^Agreed....but there is a big difference between "if they so wish" and "required"

Cheers
Spaceman

[Wayne]

TTL - check that the bank will allow you to keep the money and won't use it all to pay down other debt (assuming cross collaterisation).

[TheLiberalLeft]

Thanks for the analysis, essence.

Sell now, but take the hit on dropped values, and cover the build (almost). Or wait for the values to rise (could be years, and the cost of building only goes up too, to match). Or pay in cash, but have no backstop. Or borrow the lot. Or a bit of borrow and cash.

That's my decision to make and it's a confusing one.

[Errol]

Actually the vendor has the money and hopefully the tenant will get it.

I talked to a person a few years ago who did these and they hoped that the tenant wouldn't be able to exercise the option as they would then get to keep the cash - it worried me greatly!

There are some right bastards around that's for sure.

[WaterfrontNZ]

I would first of all ask them if they are interested in buying. If they say no, you have your answer. If they yes, go to the next step and see if they can get a loan. If no, you have another answer, consider the rent to buy option if they are still interested. Be sure not to jump ahead of any steps. People like honesty (most of the time unless their butt looks big in that dress), so keep honest with them. Don't jump any stages, you might be surprised what they can come up with. Step through it logically.