It's easy to see why people are tempted.
"Rent now - buy later!" the leaflet screams in big, bold type. "Are you sick and tired of paying rent and would like to own your own home now? ...I can help. Move into your own home today without a mortgage.. Try before you buy!"
If you're a struggling first-time buyer, this probably sounds like a lifeline. Despite the recent falls in house prices, the average property still costs around £177,000 - that's more than seven times the average wage.
And with affordable mortgage deals now only available to borrowers with spotless credit records and a 10% deposit, the outlook for some first-time buyers - particularly those without savings or a decent history of attaining credit - has never been bleaker.
But beware the property investors who, keen to cash in on the credit crunch, are attempting to lure in desperate first-time buyers with an innovative new type of scheme which is completely unregulated.
These `rent-then-buy' schemes sound very similar to the Rent To HomeBuy scheme recently launched by the Government - but confuse the two and you could face a property nightmare from hell.
Rent Then Buy Schemes
If you read The Fool regularly, you'll know we've documented the rise of sale-and-rent-back schemes over the past year. These schemes offer vulnerable homeowners facing repossession the chance to sell their home for 20% below market value and then rent it back.
The schemes promise you that you can stay in the property for "as long as you like", but then will only offer you a 12-month contract. After these 12 months are up, the new owners can put up the rent, throw you out or do anything they like to the property - you have no legal right to live there anymore.
Now, The Fool has found evidence that some of these sale-and-rent-back companies are looking to exploit the first-time buyer market, too, by offering desperate buyers `lease options' via `rent-to-own' or `rent-then-buy' schemes.
Like a share option, a lease option gives you the option to purchase the property for a set price at some point in the future. You pay a small upfront deposit, typically around 3% of the property price. This will be put towards your purchase when you eventually buy it. Then you can move into the property and "try before you buy".
Sounds amazing doesn't it? So what are the catches? I asked a top property lawyer, Lucy Riley, recommended by the Law Society, to give me her thoughts as well and this is what we came up with:
1) Clearly, the key benefit of opting for this scheme is that you get to live in the property you plan to buy. But you are merely renting this property, which means you have no legal rights to make the home your own. Like any other tenant, you need to get permission from the landlord to make any changes to the property - legally, it is no more your own home than any other form of rented accommodation.
2) On top of your monthly rent, you have to pay an extra monthly payment to the company, which goes towards your eventual purchase of the property. But these monthly payments, like the initial 3% deposit, are non-refundable. So if you do not go on to buy the property, you will lose that money. Similarly, 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.
3) You have agreed a price for the property in advance, based on today's market values. But house prices are falling. What if your home is no longer worth what you planned to pay for it? Even if you were happy to go ahead - rather than lose your deposit and all those monthly payments you made - the mortgage lender is likely to refuse to lend to you if its valuation of the property falls below the agreed purchase price. In this situation, you may not be able to get a mortgage and you also won't get your deposit back. And no one knows how far prices will continue to fall before the market bottoms out.
4) The tenancy you are granted has very limited security. If the term is less than the option period, the landlord could throw you out before you are able to exercise your option to buy.
5) As with sale-and-rent-back schemes, if the landlord disappears or fails to keep up their mortgage repayments, you may be vulnerable to repossession by the mortgage lender. You would again be likely to lose your deposit money in this situation.
Finally, even if you can afford to make the monthly payments and the rent, lease options simply aren't Foolish. 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.
My Concerns
What particularly concerns me about these schemes is that, like sale-and-rent-back companies, lease option landlords are not regulated by the Financial Services Authority. This means they are not bound by the same rules and standards as mortgage lenders or equity release providers, for example, and what they communicate to the public is not subject to regulation.
For example, I conducted an undercover investigation into HomesInAHurry.co.uk, pretending to be a potential customer.
I asked: Is it my home once I move in?
- "It's yours, and you can do what you want with it," said Judith Morgan, who runs HomesInAHurry.co.uk, in response my enquiry.
Similarly, on the HomesInAHurry.co.uk website, it says:
- "By purchasing a Lease Option from us, you can move in today to your own home and live in it and enjoy it and do it up as you would like."
Yet in the company's own `fact-sheet', it clearly states that you would have to sign an Assured Shorthold Tenancy Agreement. So you would only have the legal rights of a tenant, not a homeowner.
Similarly, it says: "No demolition or alteration can be made to the house."
It also states that, like a tenant, you must adhere to the landlord's strict rules or you can be thrown out of the property.
So I have to wonder: in what way is this property my own home, to do with as I like?
When I went back to Judith Morgan, revealed to her that I was journalist and offered her the chance to comment, she refused, adding that she was planning to wait until the article was published.
Government schemes
These unregulated `rent now - buy later' schemes should not be confused with a legitimate Government scheme, called `Rent To HomeBuy'. The Government scheme, which allows first-time buyers on low incomes to rent a property at a discounted rate for two or three years and then buy it, are being piloted across the country by the Department for Communities and Local Government.
Here are the key differences between the two types of schemes:
Unregulated `Rent Now - Buy Later' Schemes | Government `Rent To HomeBuy' Scheme |
|---|---|
Have to put down unrefundable deposit, plus pay monthly fee | Do not need to put down any money upfront. |
Pay market rent | Pay just 80% or less of market rent for a fixed length of time, to allow you to save for a deposit |
Open to anyone | You must be a first-time buyer with a household income of £60,000 or less. |
So, unlike the unregulated `lease option' scheme, you will only be asked to pay 80% of the market rent, to allow you to save up for a deposit. And not everyone is eligible for the Government scheme - you must be a first-time buyer with a household income of £60,000 or less.
The next step
So if you are a first-time buyer and one of these rent-then-buy leaflets pops through your door, I would urge you to think twice. Then think thrice. Then talk to a solicitor and get some proper legal advice.
Because if you go for one of these schemes and it backfires, you could find yourself regretting your decision for the rest of your life.
Perhaps you have come across a similar kind of scheme yourself. If so, please share your experiences using our comment boxes below or email casestudies@fool.co.uk.