Rent to buy.........seems ideal option for us but where is the catch?

D

dublinflyer1

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Here are my vital stats:

Gross salary : €45,000
Savings : €30,000
Debts : None
Credit Rating : Perfect credit history
Job security: Stable (but nothing certain in current climate)

My partner does not currently work as she is a full-time mother to our 3 year old child.

I sold my apartment 15 months ago allowing me to clear some debts and bank a small sum. We are currently renting.

On my current salary the max mortgage the banks would give me would be approx €202,500 (€45000 x 4.5). And thats probably being generous. So €202,500 + €30,000 savings = €232,500. We want to buy a house so there is a garden for our child and we also own a dog. Even with current falling prices, that sum of money would not get us a house in an averagely respectable area of Dublin.

So I have become interested in rent to buy. From the research ive done into it, it seems like the best option open to us. Steps as below:

1. Pay deposit of approx €4000. This comes off the price of the property after the 3 year rental period.

2. Sign contract to complete purchase of property in 3 years time. Purchase price agreed at the start. In 3 years time if house is valued at higher than agreed price, seller is still obliged to complete sale at original price. If the opposite happens and after 3 years the value of the house is less than the agreed price, we are fully entitled to walk away losing our deposit and the credit we have built up in the property over the past 3 years.

2. Move into property

3. Pay monthly rent amount that will come off price of property after 3 years when rent period ends.

4. After 3 years our child will be in primary school so my partner will be working fulltime. I should be on higher salary in 3 years time (cannot be assumed in current climate)

5. When the 3 year rental period is up, we would be in a much stronger position to get a large enough mortgage to buy our house.

In my opinion the pros:

The monthly rental repayments are not "dead money" as most of or all of each monthly payment comes off the final sale price at the end of the 3 year period.

We could move into our home now without waiting for the banks to start lending again.

The property would be ours rather a normal rental property. I.e we could redecorate, landscape the garden etc knowing that it is a longterm home for us.


The only con that I have read in my research of buy to let is what happens if after 3 years, you love the property but the banks turn you down for the mortgage to complete the purchase of the property.

I personally feel that you could be well prepared for this scenario before the 3 year rental period is up.

Worst case scenario and you had to walk away from the property after 3 years you would only lose the approx €4000 deposit and the credit built up in the property from the 3 years of monthly rental repayments. So basically you would be in the same situation as if you had been renting normally (excluding losing the deposit).


I am really interested to read your opinions and to see if i am missing some vital point to the rent to buy scheme. It feels like the best option for my family.

Also do you think we will see much of an increase of rent to buy in Ireland in the near future.
 
What is the price of the house your looking at? what is the rent compaired to a similar normally rented house? Have you contacted a broker or bank about what you could get in a mortgage now? What is the difference in house price now compaired with what they'll lend you?

dublinflyer1 said:
The only con that I have read in my research of buy to let is what happens if after 3 years, you love the property but the banks turn you down for the mortgage to complete the purchase of the property.
Click to expand...


You may think it is the only con, but its a huge con.
By entering one of these schemes you are taking a huge and unnecessary risk, especially in your case as you do have a deposit saved. No one knows what will happen in the property market over the next years, but having the freedom to buy when the time is right will be a huge advantage and probably guarantee you a good deal.
By entering into a deal now, at 2009 prices and lasting 3 years, its cutting down your options. The general consensus is that property prices will continue to drop during 2009 and there is very little on the horizon to improve things during 2010. You are in a very strong position, you have a good deposit saved and earn over the national average.

You are also assuming the banks will start lending at the old levels again, this is no longer in their interest. By them not lending now, they are forcing a quick correction in the market and when prices have returned to a low level the risk they will take on in mortgages will be at much safer and smaller amounts.

Finally, although no one can give you a guarantee what will happen in 2012, i would be willing to bet money that in 2012, you will be renting a house that you probably spend a lot of money improving beacuse you though you would be owning it. The 2009 price is now an unrealistic price and the banks will only give you 80-90% of their new valuation, which might be 10/20/30/40/50% less than the agreed price. In 2011 the price you're paying for rent could (will) be a lot more than you could be paying if you were just renting normally, that's extra money you could be saving and so reducing your mortgage amount when you do come to buy.
 
Do you have to sign a contract for 3 years? What if circumstances force you to move, are you liable for the remainder of rent for the 3 year term? We are single income family on 40k. The max we could get on a mortgage is 2.5 x salary. Don't presume you can get 4.5 x salary.
 
These schemes are best suited to those who don't have a deposit and are spending lots on rent and so can't scrape a deposit together; you have a deposit so doesn't really apply.

It seems that some of the buy to let schemes have a very significant premium factored into the price (maybe this is the catch?), but given that fact that you'll be saving 30-40K over the next 3 years and don't have to pay service charges (in the case of apt) then it might suit you. If the prices have collapsed further in 3 years then the developer may well decide to give further discounts, at least there's nothing to stop him doing so.

Have you compared the prices with equivalent properties in the same area?
 
Yes I have a deposit but its of no use to me if the bank will not lend me enough to buy a house. Currently paying 1300 per month rent. So obviously i could afford to service a mortgage.
 
I think if it suits you,and its cheaper for you if you are sucessful in obtaining a mortgage,go for it.Nobody can say for sure what will happen in the long term with property prices,but if the next 20 years are anything like the last 100 years the chances are that prices will rise above what they are today.after all its a home you are buying and not an investment property
 
my friend is looking at a scheme like this in Roscommon. she wants to move back there from London and has sold her place here so she is in the position of being a cash buyer. she is just not 100% sure about the move hence looking at this type of scheme. In Roscommon, I think the houses are €169,000, the rent is €650 a month and if you complete after 12 months you get €10,000 off the price.
To be honest, these prices might look low to someone in Dublin but I think she could get cheaper. I think in Longford (Edgeworthstown) there are 3 bed houses going for €120,000 so i think she would be paying €40,000 over what she could get if she waits another few months especially once the Summer holidays are over. Once September kicks in, the prices will drop even more. People will be skint after the summer hols, back to school expenses and xmas around the corner. the best time to look for deals is pre-Xmas and post-Xmas when buying a house is the last thing on peoples minds.
Dublinflyer1, I think you should wait till after the Summer, these schemes are new incentives but they will have to reduce their prices even more later in the year.
I know you cant obviously compare Roscommon to Dublin but in the estate my friend is looking at there are about 15 or more unsold houses. I also feel the council might buy these later on when they get cheaper then she would end up living in a Council Estate which is not what she wants.
 
Folks

This is a very interesting thread and a particularly well framed original question.

Please avoid speculating on house prices as it's against our rules.

There is nothing wrong though with discussing the scenarios e.g.
"If house prices continue to fall... . However, if house prices start rising again..."
 
Stand back and take another look at the situation. Whay on earth would you want to lock yourself into any contract with a developer in the current climate.

Lock your money away for two years. by then your partner might be back at work depending on the jobs market and you can appraise the situation then. in the meantime, thank God every day that you don't have a mortgage and are in a better position to roll with this recession/depression than 50% of the population who are trapped in their homes due to debt and negative equity.

The best thing you can do for your family is find a nice place to rent and forget about property for two years. take up a hobby if you have to to distract you but FORGET ABOUT PROPERTY, for the love of jaysus!
 
Good advice above, look at the long term, dont rush in to something that you think looks good today but will be a disaster in 3 years.

Look at were the property market is going, forget about were it has been, that was just madness that benefited very few and crippled many and will continue crippling people for a generation at least.
 
Hi dublinflyer,

I think you have to base your decision on the information available to you today.

If the rent payable under the rent to buy scheme is no higher than the rent you would pay for a similar house, and the ultimate purchase price is no higher than you would pay today for a similar house, then you should go for it.

You are risking €4,000, but the potential upside is good - living in "your" home now, buying in a depressed market, rent pays down ultimate purchase price etc.

No-one can say definitively what will happen with property prices in the next three years. Worst case scenario is you lose your €4k and you can afford this risk.

For your €4k you get:
(i) The right to purchase the house at today's price in three years time;
(ii) The right to live in the house in the interim, subject to payment of rent which converts to deposit if you complete the purchase.

Personally I think it's a very good deal, subject to two pre-conditions:

(i)
 
Hi dublinflyer,

I think you have to base your decision on the information available to you today.

If the rent payable under the rent to buy scheme is no higher than the rent you would pay for a similar house, and the ultimate purchase price is no higher than you would pay today for a similar house, then you should go for it.

You are risking €4,000, but the potential upside is good - living in "your" home now, buying in a depressed market, rent pays down ultimate purchase price etc.

No-one can say definitively what will happen with property prices in the next three years. Worst case scenario is you lose your €4k and you can afford this risk.

For your €4k you get:
(i) The right to purchase the house at today's price in three years time;
(ii) The right to live in the house in the interim, subject to payment of rent which converts to deposit if you complete the purchase.

Personally I think it's a very good deal, subject to two pre-conditions - I know I'm repeating myself here but I think you have to get these things right:

(i) There should be no premium built into the purchase price - the price has to be what you would pay today for the same house on a straight-forward purchase; and
(ii) The rent should be what you would pay for a similar house on the open market.

If that's the case, then I would go for it!

Kate.
 
In this depressed market you should be able to negotiate that if the value of property decreases that you can purchase at that price in 3 years.

Don't be rushed into anything. Beware of housing estates that will be left half finished etc.
 
Thanks for all your opinions.

Just wondering how common rent to buy schemes are currently in Dublin and if they are on the increase?

Are they only available on new developments which are mainly apartments (only interested in a house) or are normal people stuggling to sell their homes offering this option?
 
Hi there,
I doubt very much if ordinary sellers are offering this option. Maybe the odd investor... I live in the west and there are a couple of developers doing it with new builds and investment properties - houses and apartments.

Kate.
 
Hi
Some great advice above on the rent-to-buy market.
Has anyone looked into this option in Stepaside through easisteps.ie?
Debbie
 
It seems to me that the purpose of these schemes is to lock in at current prices (as estimated by the Developer) as well as provide income for the developer to service the development loan. The former would suggest that developer is betting that prices are still going down over the next couple of years. If so, you would get better value holding off on your decision to buy.

When I heard some of the rental figures advertised I thought they were a bit high in the current soft rental market. In fact, I thought you could probably rent at a better location for the same money.

I imagine the developer is hoping that by living in the house you will get comfortable with the location - schools etc. and not want the hassle of moving so soon, especially after paying all that otherwise 'dead' money and deposit.
 
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