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'Rent To Buy' Schemes

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  • 'Rent To Buy' Schemes

    I know this is an Australian article but I presume the same thing applies in New Zealand.
    One person is offering a number of rent to buy houses in Tokoroa.
    These can be seen on TradeMe.

    New name for an old scam.

    by Neil Jenman

    Home ownership, that great Australian Dream, is harder than ever before. Across the nation, tens of thousands of families are locked-out of homes they can never afford to buy.

    The rising cost of rent plus day-to-day living expenses makes it almost impossible for these families to save even a minimal deposit for even the most modest home.

    And the banks, well, they just won't touch these battlers who, desperate and despondent, feel doomed to a lifetime of renting. Many would do almost anything for the slightest chance to own a home. It's a national tragedy.

    And so, when they hear about a scheme called 'Rent to Buy', their hopes surge. It's like offering water to someone dying of thirst.

    It sounds so simple, so alluring. Instead of renting a home you'll never own, you can now rent a home that you will own. Surely that's cause for celebration.

    Sadly, no.

    Here is a simple fact: 'Rent to Buy' schemes are dangerous scams. They are designed by predators who prey on the poor. They are a complete rip-off and should be outlawed.

    Like all slick scams, 'Rent to Buy' schemes are so seductive. The pitch goes like this: We are here to help you. We have a unique system. If the banks reject you, we can help you.

    And on and on and on it goes. One twisted truth after another.

    The straight truth, however, goes as follows.

    Victims of these scams (many of whom do not even realise they are victims until it's too late) are ripped off in three ways.

    First, they are charged an exorbitant amount of rent.

    In just one typical example, a property offered by a mob called Rent 2 Buy Pty Ltd (run by a 35 year-old spiv called Troy Boldy) offers a home for rent in the Sydney suburb of Fairfield at $550 per week. The market rent is about half that amount.

    Astonishingly, Boldy himself openly admitted yesterday that his rents are "double" the market rent.

    Okay, so that's the first part of the rip off. Buyers pay double the market rate for their rent.

    Second, as well as the exorbitant rent, the "buyers" (victims) pay an exorbitant price for the home.

    Sticking with the same example of Troy Boldy and the same home in Fairfield, the purchase price being asked for this home is $380,000.

    Yesterday, a local agent estimated its real value at between $250,000 and $270,000.

    So, on top of the double rent, the victims are also paying at least $100,000 too much for the home.

    From the moment they sign up with Rent 2 Buy Pty Ltd (or any similar company), they have instant negative equity (meaning they owe at least $100,000 more than their home is worth).

    The third rip-off with the 'Rent to Buy' schemes is that the buyers are not the owners of the homes they are buying. No, the homes remain in the name of the rogues running the scams.

    Quite simply, this means that if the buyers pay the rogues and the rogues go broke or their companies collapse (as many do) then the buyers - who have done nothing wrong - are instantly evicted.

    These schemes (sorry, scams) are just a variation of the notorious wrap schemes which were once promoted by get-rich-quick spruikers such as Henry Kaye, Steve McKnight and Rick Otton.

    Mr Otton still runs seminars - at thousands of dollars a ticket - where he teaches hundreds of wanna-be-property multi-millionaires how to set-up these predatory scams to exploit battlers.

    As the housing affordability crisis gets worse, more predators will be attracted to these scams.

    As the trusted finance commentator, Ross Greenwood said: "These could be the financial scandals of the next five years." He's right.

    Now, before the usual abuse from rogues spews forth at the author of this article, here's a final message to any battlers who may be tempted by these schemes...

    Go and see an independent lawyer before you sign anything.

    Any lawyer with any intelligence or integrity will tell you to have nothing to do with these typical 'Rent to Buy' schemes.

    "There's one way to find out if a man is honest-ask him. If he says 'yes,' you know he is a crook." Groucho Marx

  • #2
    Hi Muppet
    You get all the good news.

    In principle I agree with mr Jenman on this one although I say this with the following caveat. The concept of the Wrap or the Rent to buy is not a bad one, the problem is lack of regulation and greed.
    It is easy to double the rent and increase the price to double its value. So people do it and what was a great concept that was a win/win for everybody becomes a win for the wrapper and a burdon for the buyers.

    I am pretty sure in most states in Oz the practice of wrapping was outlawed. I think. Someone may need to confirm that. Certainly the banks frowned upon the activity and tried to prevent it where they could.

    thanks for the article.


    • #3
      While I think RTB does disadvantage tenant buyers, this piece from Jenman is pretty poor. It does not accurately represent RTBs (although some might operate like this).



      • #4
        Originally posted by SuperDad View Post
        While I think RTB does disadvantage tenant buyers, this piece from Jenman is pretty poor. It does not accurately represent RTBs (although some might operate like this).

        I guess thats my point too Paul.
        I first read about RTB and Wraps about 10 years ago and I thought hey that sounds cool. I want to do that one day as it is a creative way to help someone achieve their goals. My number one goal is one borrowed from "the one minute millionaire, Randy Pausch and an early mentor of mine Des Davis and that is to enable other people to achieve their goals".

        Th wrap looked like a great way to create a win/win for both me and for the renter.

        Obviously along the way like a lot of great products that are unregulated it has been bas##%%dised and ends up being mis-used and in more instances than not a scam as Jenman points out.

        Very unfortunate in my eyes.


        • #5
          I've never seen a good rent to buy, and I know that for the 13 years I've been involved with the mainstream banks in NZ, they've always been frowned upon.

          I'd be interested to hear some numbers associated with a true win/win rent to buy.


          • #6
            The amusing thing for me is that the buyer in sydney was essentially taking on a mortgage on a home. In any suburb in Sydney it always costs at least twice as much to repay a mortgage as it would cost to rent, so these figures sound entirely reasonable in terms of the weekly payments to end up owning the house.


            • #7
              Hi Mark.

              You should be in bed getting ready for the big trip.

              I agree with you that I have never seen one in practice but let me assure you when I read about them approx 10 years ago I thought hey great idea.

              Now I know I will be slammed for my naievity but this is how I saw the transaction.

              Investor buys a property, lets say his name is Terry and he is a really great bloke, he believes in helping others but also understands the concept of needing to help yourself as well unless you want to be a mother Theresa or Ghandi, which he doesn't.

              So Terry being an asutute investor (but bad speller) and a particularly good negotiator buys a property at say 20% under true market value because he offers cash unconditional settlement in 7 days to a desperate seller.
              So lets say the property was valued at 200k and Terry has bought it for 160k.
              Terry has the option of renting it out for a yield of lets say (it is in Auckland CBD) so $300 per week or he can put it back on the market to sell in todays dollars at $200k or fair market price.

              Terry being an astutue investor (but still bad speller) understands the concept of net present value and works out that with the market having the potential for capital growth of lets say 4% factors that into his calculations and decides he will do a Rent to Buy.
              So Future Value at 4% in year 5 is $243,000.

              Terry agrees to sell to the Rent to Buy person at $243,000. The risk Terry faces is that the property is worth more in 5 years and the Risk to the Rent to Buy person is that the property is worth less.

              In the mean time Terry would have received rent at $300 per week however what is needed between now and 5 years is for the Renter to have created a deposit or about $24,000 of equity and Terry also needs to create a return on his investment for providing the service.
              i.e I have borrowed the whole $160k at 9% so I need to lend it out at a margin that provides me with a reasonable ROI.

              I lend the Rent To Buy person the whole $243,000 at 11% which gives me a 2% margin over what I am paying (of course this is all reworded as Rent etc etc so that I comply with bank policy etc) and equates to $514 for the Rent to buy person.

              So in this transaction I have locked in a profit from my good purchasing, I have also locked in capital Growth of 4% and I receive a margin of 2% on the money.

              The Rent to Buy person has now entered into a Transaction where they will own the property eventually and they are sharing in any capital growth without having to come up with a deposit. Of course if they had put the extra $200 away fro 2 years they would have created a deposit but the property market may have got away from them so the deposit was insufficient. Also they may not be elligible for a mortgage due to poor credit.

              So a service is provided and everybody is happy... I hope.

              I just made the numbers up so if it seems extreme make the margin on the loan 1% and the FV 2%

              Remember though Terry has to use his equity now to buy the property and he is not able to invest in other things while his equity is being used to secure the existing property.

              Yes there really is a Terry land....lol


              • #8
                Example of one deal available in Tokoroa at present:

                Modern warm (fully insulated) superior quality 3 bedroom house on huge 809m2 level freehold section.

                Totally refurbished inside and out -
                New Code of Compliance.

                Currently rented at $150.00 per week.

                RENT TO OWN with little or NO Deposit and weekly payments of $281.00 per week (includes rent / rates/ insurance and a principal reduction of $30.00 per week)


                Available now as an outright cash purchase at the asking price of $141,000.00

                Be sure to check out other similar properties I have For Sale on TRADE ME by clicking "seller's other listings"


                If this property is not suitable,
                We are more than happy for you to source a suitable property; we will purchase it, and sell it to you on a Rent To Own Agreement, at a price which will include a margin on our initial cost.
                We would require a minimum deposit of 5% of the sales price.

                The weekly payment is calculated on the balance owing (ie: sales price less any deposit paid) using OUR interest rate of 9.2% (far less than current Bank Mortgage Floating Rates which are now above 10%) PLUS Rates, Insurance, and a Principal Amount of your choice - usually a minimum of $30.00 per week.

                Terms of the Agreement are relatively flexible and open to negotiation - but usually: 3 years, with an option to extend for a further 2 years, but you also have the right to take title at any time without penalty, by arranging your own finance and repaying the balance.
                You also have the option of making lump sums principal reductions at any time without penalty.
                "There's one way to find out if a man is honest-ask him. If he says 'yes,' you know he is a crook." Groucho Marx


                • #9
                  Actually I just did the calculations. For a 25 year loan at the standard 9.6% variable rate the weekly repayments for a 100% loan on the minimum house value given of 250k would be $508 per week. Add on the extra LMI for borrowing 100% here in Australia and $550 per week sounds like just the right amount for a mortgage on this house value in Sydney.


                  • #10
                    Thanks Muppet

                    That looks totally fine to me.
                    Of course you would have to want to live in Tokoroa.

                    As long as the agreement that the solicitors create provides protection for the buyer then I can't see a problem.

                    I never ended up doing one because by the time I was able to they were so frowned upon in Oz it wasn't worth the flack that would have come with it.

                    Mark what do you think of the one muppet has shown?


                    • #11
                      Problems with Muppett's example.

                      1. The numbers - the tenant is paying $130 above market rent, of which $30 is a rent credit. Thus they are paying an extra $100 per week simply for the option to purchase the house. This could instead be saved towards a house deposit.

                      2. The option price of $141,000 - is it inflated? It might not be in this case, I don't know. But the presenter of the recent RM LO course - John Gourley - was a proponent of inflating the purchase price. This makes it even more difficult for the tenant buyer to secure finance.

                      3. Proponents of LOs seem to like to point out that paying (for example) an extra $100pw over and above rent is nothing when house prices double every 7 years. Well, even if the Tokoroa house is worth $141,000 today, I doubt that it will be worth $146,200 in one years time, or $151,400 in two years. (This is the amount it would need to be worth if the tenant buyer is not to lose any of that $100 extra they are paying.)



                      • #12
                        Hi Paul

                        I am with you and Mark on this but also liking to play devils advocate a little.

                        In muppets example the issue is actually that the property is in Tokoroa.

                        If the property were at say The Mount, and the property was not inflated would it now be an ok investment?


                        • #13
                          If it were at the mount, it would be fair to assume that the numbers would be doubled.

                          In which case the tenant buyer would be paying $200pw simply for the option to purchase an asset that is losing value.



                          • #14
                            What if it was 2003 and at the mount


                            • #15
                              Originally posted by tpr2 View Post
                              What if it was 2003 and at the mount
                              Then the numbers might well be different - it could be the case that growth outstrips (and so compensates for) the dead money paid each week.

                              But that doesn't mean that a RTB would be a good idea.

                              When entering a RTB, the tenant buyer is taking two risks that the standard homebuyer doesn't:

                              1. The risk that they won't be able to obtain finance and exercise their option to purchase. In that case, they should get back their "deposit credit" (the $30pw in the Tokoroa example), but the extra $100pw is gone. I'm sure that there will be a lot of tenant buyers in the near future who will find that their house has not grown in value by nearly enough to enable them to refinance, especially with banks tightening up on lending.

                              2. The risk that the investor goes belly up.