26 Dec All that glitters is not gold – Peter Carter
Solicitor Peter Carter answers our questions about the ‘rent to buy’ schemes that are catching many would be Aussie investors. We continue to be concerned and Peter says that more investors are not heeding the warnings.
Kevin: I don’t know if you’ve seen it in your area, but I’ve certainly seen it in mine. Driving around, you’ll see signs on lampposts and street signs that say, “We will buy your house for cash. We’ll pay the full price, and we’ll buy it now.” What’s behind those? It’s a rent-to-buy scheme, and I want to talk about it because it has been of concern to me for some time.
Peter Carter is from Carter Capner Law, and he joins me. Peter, I know you know what I’m talking about. Could you just explain how these schemes work?
Peter: It depends on the imagination of the entrepreneur behind it, but typically it’s a situation where the perhaps desperate, or hopeful, or optimistic seller thinks they’re going to get a bargain out of this type of deal. On the face of it, they do.
The entrepreneur offers to pay full price, but it’s a projected long-term settlement. Usually they’ll pay an option fee of cash or sometimes it’s even monthly fee. But they get the right of immediate occupation. The entrepreneur – or agent; let’s call them that – gets the right of immediate occupation, and they install their customer as buyer under those terms.
The option fee is paid out of the rent received by the agent’s customer to the seller and comes off the ultimate purchase price. But if you have a three- or five-year term involved there, it can become a nightmare for the owner-seller. They might never get paid, and that’s often what happens.
Kevin: Is the figure that’s paid today’s figure, or is it the figure projected toward the settlement time – which could be two or three years away)?
Peter: It’s today’s figure, but it’s the asking price. There’s usually no argument about what the asking price is, because the object of the entrepreneur is to get hold of the house so they can put a tenant in.
Kevin: The real risk here, of course, for the seller is that you’re giving up occupation. There have been a number of occasions, I believe, where the property either wasn’t settled or when it was due to be settled, it was trashed.
Peter: Yes, that’s right. The attraction to the buyer is that they get a long time to settle. They’re actually only paying rent, and part of that is going to the buy price, which to many punters looks attractive. But of course, the entrepreneur is taking a cut as it goes through.
Kevin: Then of course, the risk is that the property won’t settle. What sort of recourse do you have in this situation? What are the contracts like, Peter?
Peter: They’re innovative, customized contracts, and they have all sorts of weird and wonderful conditions. The ultimate outcome is that neither the buyer nor the seller is satisfied – legal action is required, or sometimes Fair Trading intervenes.
Kevin: What would be your advice to someone who brought you one of these contracts?
Peter: Certainly have a good look at it. Look at all the fine print. Sellers beware, and buyers especially beware. I’ve never seen one come out well.
Kevin: What happens to the poor tenant in the middle of all this? They’re going into the property, and they assume that they’re paying rent, which is being split between two parties.
Peter: Well, remember, the tenant is the buyer. That’s how the entrepreneur makes it all work. They get a buyer in – a very optimistic buyer – who that thinks instead of paying rent they’ll own this house one day. But it really is one day. I’ve seen contracts where it would just be impossible to actually finally pay the ultimate purchase price. It just doesn’t add up.
Kevin: Yes. You’re preying on the dreams there of someone who wants to get into a house, and maybe they can’t do it in the traditional way by getting a loan, so this is the only way for them to do it. Pretty risky all round.
Peter: Pretty risky. The typical advertisement you see is not just signs on lampposts; you’ll see advertisements in newspapers, etc. A good example i, “We want ugly, smelly houses, debt-ridden houses. Any price, any condition. If you don’t want it, we do. We can buy your house fast. Agents can’t.” That’s the sort of message they’re putting out to desperate sellers.
To buyers, the advertisement typically runs “Own my home! Must sell! Stuff the banks! Move in today!” – that sort of thing.
Kevin: The alarm bells should be ringing when you read that sort of stuff.
Peter Carter has been my guest from Carter Capner Law. Peter, thank you so much for bringing this to our attention, and thanks for your time.
Peter: Thanks, Kevin.