A Dangerous Way To Buy Your First Home

I am not involved in any form of renting, buy to let or rent to buy systems but reading the article I too was incensed by the tone of the article. I have come to expect an unbiased comment from the Fool commentators but sadly this one failed.

Firstly let me declare my interests; I am a landlord and proud of it. I house over 50 clients who are given a good service in return for rent payments. No I am not wealthy this is a long game and I have done this for one reason. Pension erosion by governments and regulation. As you will see the main thread of this post is don’t believe all you read.

TMF used to be a place to get good advice.... not anymore! This article is factually incorrect, poorly researched and is what has TMF has become; another scare mongering media outlet fixated on bottom line.
1) This is not new; it has been in the US for 30 + years, Australia, Newzealand etc.
2) It was not brought about by this “Credit Crunch”
3) Options contracts are widely used throughout the UK and Scotland for land property purchases.
4) Regulation is not always a good thing, it limits flexibility. Protection is ultimately through the law not adding red tape and hoops.

It’s amazing the difference in psyche here; I saw this on TV in Australia years ago and they had a programme dedicated to it. It explored the benefits and the draw backs in a equal and fair handed manner giving both sides of the story. In the end the editors’ opinion was that it was innovative, helped people who were marginalised, for of a myriad of different legitimate reasons, from getting a mortgage. It assisted getting their foot on that all important first rung of the property ladder. It helped the new home owner gain a good credit rating and they were soon catapulted into the usual mortgage based banking system.
My 2 pence: If you are going to purchase a property, no matter how, get a solicitor he/she will protect you. Go in to any deal, where you have to pay over your hard earned cash in, with your eyes open. Trust what someone says to you but, verify this with your solicitor. Finally stop believing all the negative hype, it’s there to sell newspapers drive/ traffic to a website, so they can increase readership and in turn increase revenue. The other thing it does is paralyse you from doing anything.

Rent to Buy is very popular in America and Australia. It is a creative way of getting on the property ladder and offers many benefits to those who currently cannot get a big enough deposit. It allows the tenant buyer the opportunity to plan financially and the rent credits offered help towards the purchase.

This article does not mention about those who have a high disposable income and do not qualify for a mortgage because they have not been in the country for long. This affect many who come from abroad. Without this scheme, they are not able to get on the property ladder and have to throw rent money down the drain month after month.

The Rent to Buy is the way forward for the current economic situation. Contracts are drawn by qualified lawyers so I do not see anything dodgy about it.

This writer, as with most journalists nowadays, wrote this article with a particular premise in mind and sought whatever justification to prove or substantiate her points. This article gives only one side of the story. It is not objective. And was written with the sole intention to discredit the scheme. Frankly, we need innovative action in the housing market right now. It certainly will not come from the guardian. And regulation? Does the writer assert that everything regulated affords protection and fairness. Rubbish. Where were the regulators when this whole sorry mess was being created. I would say o the journalist here, that you will improve your credibility and future career prospects if you employ the true fundamentals of journalism. x

Average house prices are more than seven times average annual salary...that says all you need to know and what has to change. Forget everything else that's just foo-foo at this point.

I think that there is a world of scamsters out there who have been riding the recent property boom trying to make cash of anyone they can from: first time BTL landlords to renters and those seeking to purchase their £1m property portfolios. Worth looking at the singing pig web site to explore this sub culture further.

'Innovative' products usually carry higher risks for anyone getting involved (apart from the saleperson that is!). As always 'buyer beware' and remember that something that seems to be too good to be true usually is!

This is a sensible article in the foolish tradition, pointing out the risks of using innovative products in a declining market. Best thing a first time buyer can do is to sit on their hands, watch prices continue to decline and save as much deposit as possible.

Even Savills are predicting a 25% price decline from peak to trough and the earliest they see matters improving is in late 2010/2011.

Renting seems to make good sense at the moment, its saving me between £2k & £3K a month, as prices in my chosen price range drop.

Chas

I agree with frugalfriend. Some people seem to be oblivious to the fact that the whole housing market was pushed up largely by the exploits of con artist developers / agents for developers, with schemes such as loaning the initial deposit, and putting the value of that loan on top of the original house price, making the house appear more expensive than it actually sold for, completely distorting the land registry figures.

Fist time BTL landlords are not completely at fault, they merely followed the BTL hype thats been screaming from almost every newspaper, TV property programme... and Motley Fool.

I am so annoyed by the constant misreporting by many of these articles. I work for a small developer and we have started to offer 'try before you buy'. A ftb gets to rent one of our properties for 6-12 months covered by a normal AST paying a market rent with no additional payments. If they want to buy after this we will give them back the rent they have paid so they have some form of deposit. If not they can walk away like any other rental.
On inflated prices the mortgage company will value the property when they decide to buy i.e. after 6 months. If prices have dropped then the valuation will show this. We can not inflate prices as banks will value the property themselves.
This scheme allows first time buyers to try a property and the area, save a deposit and also 'wait and see' on the market. My company is not trying to trap people into buying a home but we are trying to get through some tough times ahead!
I'd love to see some positive reviews of what most housebuilders are trying to do even if all the schemes available are not suited to everyone.

What an easily incensed bunch we've got commenting today! I think Donna is quite right to be biased against these schemes - they are run by companies with marketing budgets and clearly, at least in the one case that was investigated, have staff that won't tell prospective 'purchasers' what their actual rights are. Therefore I think that it's good that The Fool is publishing an article that will make people think twice (and ideally hire a good solicitor to check the contracts) before signing anything. It doesn't say you shouldn't go for such a scheme under any circumstance - just that your rights aren't necessarily guaranteed by law (apart from those of a shorthold tenant). If that's flawed and biased, then bring on more propaganda!

As an FTB, i've been looking around a lot to see what is available. Ive enen researche these so called rent now - buy later schemes. And most of them are not like the one that Oliree's company are offering.
Why should we pay rent on a property, along with another payment towards a Mortgage? And when we decide to buy, not get any of our rent paid back? A massive scam if you ask me.
I'll just sit it out, and watch the prices (and the fool's site) and buy when i'm ready

Not read all the comments above, but have got the gist of what people are saying.
I do believe there are unscrupulous landlords out there that would kick people out on a whim, but some of the comments made in the article are just good business sense.
You can do what you like with the property on a limited basis, ie no structural changes, like painting and decorating, which enhances, in most instances, the value of the house. As for people not getting a mortgage at the end of the rental/lease term, that is a chance they are taking, in todays volatile market there are bound to be winners and losers, after all it is not guaranteed that house prices will continue to fall and some people may find that the price they pay, works out well for them if the house prices start to rise again within their contract period.

At the end of the day, the only thing I find unscrupulous is the fact that the companies are asking for a non-returnable fee towards the cost of the house, since these same people would be paying rental fees anyhow to live in a property.

Cut out the middleman.
This article could have been written as helpful advice to first time buyers.
1.) Find the location and a number of properties that match your criteria.
2.) See if any of the vendors would agree to a rent that will cover their existing mortgage and would give you an option to buy at a price that you both think is fair. Some vendors need to sell because they cannot afford the mortgage and do not necessarily have to sell because they need any residual equity for another purchase.
3.) This offers some vendors a chance to meet their mortgage obligations and subject to negotiation have a chance of gaining some equity when the option is exercised.
4.) On the assumption that house prices will recover within say three years the tenant/buyer will probably get a 90% mortgage based on a value that is at least 10% higher than the agreed option price.
5.) The vast majority of properties can benefit from some improvement, which the tenant with prior agreement of the landlord/vendor could effect to further help increase the value in due course.
6.) If all else fails the tenant is in no worse position than with a normal rental agreement and the vendor has met their mortgage committments with the possibility of some shared equity in due course.

This information is readily understood by the 'wicked' property investors and is readily available in various forms through the internet.

So instead of being a 'poor, ignorant and suckered FTB' think like a property investor and cut out the middleman.

This type of arrangement is perfectly legal, can be completely fair to both parties and should be set up with the proper and independent legal advice for both parties.

The rent to cover the mortgage could well be below the full market rent and therefore assist saving for deposits/improvements etc. The option price could be subject to independent professional advice and any benefit of increased value could be shared equally.

This idea helps innocent victims of the banks stupidity in getting caught up in the 'credit crunch' to get on with the business of meeting financial obligations and benefitting from home ownership.

So if you want your first home now why not give it a go. If house prices completely collapse you do not have to exercise the option. If they recover within three years you could benefit greatly by doing this. You only lose this benefit if you cannot do a deal on this basis.
What do others think?

"if you fall behind on your rent or your monthly payments, the landlord has the right to throw you out of the property and you forfeit your right to buy it – and lose all the money you have paid the landlord so far." How terrible! So as landlords, we should provide an option for the tenant to buy but we should do it for free and not even complain if they fall behind on their rent?

"Remember, if you were renting another property, you could put those ‘monthly payments’ into a normal savings account, paying around 6.5%. The money will always be instantly accessible to you – whether or not you decide to use it to fund a property purchase"... like maybe being tempted to buy a depreciating asset, such as a car, or go on holiday. Let's face it, they would have done this before if it was that easy, plus the fact that house prices appreciate faster than savings interest rates. If they are in their rent to buy home the idea is that they are able to tap into the long-term appreciation.

The advice from the lawyer is flawed, too. Even on point no. 1. Of course they have protection, they have an AST which is linked to a purchase option and remember that the option to purchase is a one-way street. The tenant doesn't have to buy but the vendor has to sell.

Every agreement is negotiable, not all of these deals are the same, some don't even require additional payments over the monthly rental, it depends on the property, the area the property value and the tenant.

This is yet another example of Fool's scaremongering and shooting down a solution which has been a lifesaver for many but without offering any alternative (apart from saving up for a deposit).

PS It's also worth pointing out that the company I was dealing with allows you to SELL the house if you want before actually paying for it yourself... I guess the company (being run by a married couple) is only interested in making some cash out of their properties in whichever way they can; if I decide I don't want the property then they've benefited from X amount of months rent. If I do decide I want to buy it then they benefit from X amount of months rent plus guaranteed sale. If I decide I want to sell it then the same applies and they don't care because they still get the pre-agreed price, plus the X amount of months rent and I get whatever money is left over, if any. The point being that you don't ever get forced in to any decision - as long as you apply good business sense then you won't lose out.

The only thing I disagree with however is that the installments (which in my case would be £100 a month) are non-refundable. Technically the installments towards the house are purchasing a share of that are they not? After a year of paying £100 a month on top of the rent of a £120,000 pre-agreed final price, you've bought 1% of the house yes? So how come if you walk away you give that 1% up??

The rest of the rent I agree should be non-refundable, as that was RENT and not part of the installments.

I applaud this article. If nothing else it will encourage readers who were considering this type of scheme to do more research. journalism is supposed to provoke debate and enable understanding of an issue. A few posts have sooo obviously been posted by people with a vested interest that its embarrassing.

Personally, as a potential FTBer I wouldn't touch these schemes with a barge pole. My advice to those who are more easily tempted by a rancid carrot dangled in front of their nose is;

If you want to rent a home go to a landlord. If you want to buy then go to a home owner/EA. Its that black and white. If you can't afford to buy, and want to then ignore all of these whooly fuzzy grey schemes (including the governments) and earn yourself some interest by saving for a deposit. Have some patience, keep your aim steady and powder dry, and rent until your target comes into range . There is no shame in renting and saving – only in burying yourself in debt that you can't afford to service. It really is that simple. Part-ownership schemes and rent to buy are one of the many symptoms of an over priced housing market. Don't let them suck you in.

This is one of the poorest bit of hack journalism I have ever read.

Having bought a property this way in Australia 8 years ago I found it a god sent idea and deal. I was able to build/repair my credit history. While buying my own house. So that I was able to qualify for a mortgage and take full ownership before the end of my option.

I am sure 99% of the property investors out there are good honest landlords trying to make a buck/build a pension despite Gordon Brown and ill research journalism.

in reply to ddraigy " Why should we pay rent on a property, along with another payment towards a Mortgage? And when we decide to buy, not get any of our rent paid back? A massive scam if you ask me". Apparently he/she expects to try before you buy free of charge. Get real mate.
I work for a registered social landlord and we have been doing this for over a year for new build properties on our own mixed tenure developments. The customer pays a small deposit then rents for a period. If they proceed with the purchase the rent paid goes towards their deposit. The deposit is more of a bond to cover the cost of any repairing any damage to the property should the tenants leave. This is an established practice with market (ie private landlord) lettings.
The tenancy agreement, which is the contract between landlord and tenant, clearly states the terms and conditions, and responsibilities of both parties. The tenant is given the legalright to occupy the property subject to the terms and conditions of the tenancy. During this period the property is the customers home but remains the landlords property. As such it is common practice that the tenant cannot carry out any alteratins or modifications with written permission from the landlord. I suggest that anyone on a rent to buy agreement should wait until they own the property before altering/modifying it otherwise the lanlord can and probable will charge they outgoing tenant to restore the property to its original condition.
Schemes operated on this basis represent a very good deal for prospective buyers in my opinion. For first time buyers it gives them an apportunity to experience the full cost of independant living ( ie gas, electricity, council tax) and often an opportunity to find out if they can live with their partner (you dont really know what living with someone is like until you live with them in the real world and not just for a fortnights holiday or house-sitting).
There are caveats of course. Any scheme that sets a future purchase price becomes very risky in a falling market.
A further caveat is "buyer beware". In principle these schemes are a good idea and can benefit first time buyers in a number of ways as outined above. However not all rent to buy schemes will be the same. There will be good and bad schemes and equally good and bad providers of such schemes.
My advice is to find a reputable provider, thoroughly research the products available but more importantly avoid making hasty decisions. This will work well for some but not all.
Ultimately it todays housing market, my advice would be to stay at home, save as big a deposit as possible and waith 12 - 18 months for the bottom of the market.

I think the point the article is trying to make is - be very, very cautious. Sure, the principle of 'try before you buy' sounds like an eminently sensible idea, and I'm sure there are many honest schemes out there. But there are also many that are not, and this article sounds a warning that they are often difficult to tell apart.

Unfortunately, many of the people these schemes are appealing to are the vulnerable poor trying desparately to stay/get on to the housing ladder. Whether they should or not is neither here nor there, many want to. They are also the most likely to default, and they need to know what they are risking. Especially as it appears to be difficult to get a clear answer in all cases.

I don't believe regulation is necessarily the only answer, but it does tend to shine a spotlight on what is and isn't reasonable, and discourages the worst scammers.

Chasbmw said that susbsidies to firt-time buyers are reflected in the purchase price of the properties involved, and are therefore a subsidy to the vendor rather than the purchaser.

I don't think this is right. If a house can be sold on the open market for £175,000, but where a first-time buyer is involved, the Government will stump up £25,000 so that the FTB can buy it for £150,000, who is benefitting? The vendor will get his £175K with or without the subisdy; but without it the FTB might not be able to buy at all.

I accept what you say, gordonbanks42, but when it comes to having regulatory rules enforced, this is done by an arbitration service that delights in making decisions that neither the courts nor existing legislation would necessarily support, in order to impose its own version of "justice," secure in the knowledge that almost no-one will challenge its actions through judicial review because the costs are too high.

Thus "let the buyer beware" is replaced by "may the seller be blamed," turning the whole philosophy of English law on its head.

A very interesting debate. I have been in property investment for 17 years, so have experienced the ups and downs of the market. This is a long term business. Last year I completed my first "sale and rent back" deal, I have a very good tenant who is delighted to have been able to continue living in his property, having been let down twice for more than a year with other investors promising him they could do the same, and trying to squeeze him on price at the last minute.

I have been aware of rent2own (and its associated alternative lease/purchase option) for a year now, having attended presentations on the topic. I have pursued this method of investing in property as an addition to a conventional portfolio because I do believe it offers the seller, the investor and the prospective future buyer a facility that is not available from the conventional banking system in the UK. That facility is about the value of time to each party. A seller who wants to sell fast may be forced to sell at a price that does not allow them to move on to their next goal in life, be it emigration, moving up the ladder, retirement, or other. The prospective buyer may not have a deposit saved, may not currently have a c