The traditional way to arrange the finance to buy a home has always been to visit your bank or mortgage advisor to find out if you would be accepted for a mortgage. However getting a mortgage these days is not that easy and there are many hoops to jump through as Generation Rent know too well. It seems that if your waist size is wrong then there is a good chance you will be refused for a mortgage.
It's not everyone who wants a mortgage either (or death pledge as it was originally derived from), why would you want that massive debt hanging around your neck for 20 to 30 years when instead you could rent a home giving you more freedom to move wherever and whenever you want to. Why take on more debt when you don't have to?
We are in the age of the gig economy where self employed freelancers, online entrepreneurs and digital nomads earn sporadically yet often very well, they often have more than enough income to pay for a mortgage but most of them have to rent due to their style of work.
This sector of society could be earning ten times more than those in a traditional 9 to 5 job and have the means and ability to take on a mortgage but are less likely to be approved for one.
Generally the rent that they will be paying is higher than a mortgage repayment would be.
Unfortunately out of touch mortgage lenders have not yet caught up with this growing sector of society but once they do they will be quids in as it is becoming ever more popular to be your own boss and work on your own terms.
So if you cannot get a mortgage and don't want to keep paying rent on a property that you will never own then what is the alternative?
Rent to Own!
These types of agreements are becoming more and more popular the world over with home buyers, property investors and sellers who think outside the box and are keen to take advantage of them.
Depending where you are in the world these types of agreements go by different names and are loosely based around the same principal.
Rent to Own also known as Rent to Buy, Lease Purchase, Lease Purchase Option and Instalment Sale lets a buyer take on a property and pay the balance over a set period of time without the need for a mortgage.
To rent to own you agree the price of the property and the length of the term with the owner from the outset.
During the term of the agreement you will rent the property as normal from the owner. The icing on the cake is that your rental payments will be deducted from the balance of the property, so that by the end of the term you will have cleared the balance and you can then become the new owner of the property. This means that you are no longer losing money on rent, rather you are investing it in a future acquisition.
With rent to buy houses there is no interest to pay, so you will know exactly how much you are paying for the duration of the term.
It is normally agreed that it would be the buyers responsibility to take on all costs associated with the property during the term and maintain the property to a good standard.
Rent to own offers a lot of flexibility as you can live in the property before you have cleared the full balance. This can work well for people who want to try living in a new area or country that they are not overly familiar with or do not have the means to get a mortgage as a foreigner.
It gives you the chance to try before you buy.
Another benefit of rent to own is that the tenant buyer is under no obligation to buy the property, so if they decide to end the agreement they can give the owner notice to cancel.
Only the seller has the certain commitment that they are obliged to sell the house to the tenant buyer providing they are making the ongoing payments and keeping the property in order.
If you do not want to proceed with a rent to buy home you do not have to and there would be no bank or mortgage lender chasing you for the balance.
Similarly if you choose that you want to clear the balance early then you can do that and there would be no early repayment penalties like you often have with mortgages.
From a property investors point of view rent to own is a no brainer.
The investor agrees to rent to buy a house from the seller.
The price and monthly instalments are agreed the seller from the get go.
The investor then puts a tenant in the property who will pay them a monthly rental amount.
The investor then uses this rental income to pay the seller to help clear the balance.
Once the balance is cleared the investor will become the owner of the property.
This means that the investor has added another property in their portfolio by paying very little for it.
Why would an owner sell this way?
Their property has been on the market for a long time and is not shifting.
They have tried dropping the price and it is still not selling.
There is an over supply of properties for sale in the area.
There has been a potential buyer but can't get approved for a mortgage.
The owner does not want the hassle of being a landlord and maintaining the property.
The property needs work and the owner cannot afford to fix it up.
The property has gone down in value but the owner wants to claw back what they originally paid.
The owner is in no hurry to sell but likes the idea of getting more coming in each month than market rent.
The associated property costs are too high and the owner is not making much on the property, this way they will have more coming in and no outgoings.
The owner has a large portfolio of properties that are becoming too much to manage so the idea of letting some of the more difficult properties go is appealing.
The owner has moved overseas.
Where can I find rent to own homes?
You can sometimes find rent to own homes on Property Hotspots, on classified sites like Gumtree or on Rightmove Overseas.
Using a Solicitor:
It is important to use a qualified solicitor who is experienced in preparing rent to own contracts in the country where the property is located. So if you want to rent to own in Spain use a Spanish solicitor, if you want to rent to own in Italy use an Italian solicitor, rent to own in Dubai use a solicitor in the UAE and so on.
The solicitor can normally have the agreements registered for you at the equivalent of the land registry in the particular country.
You can find some examples of rent to own properties on Property Hotspots.
If you have any questions about rent to own properties fill in the contact form or find me on LinkedIn, Instagram and Facebook.