Rent to buy?

Soarer

Morning all.

We're looking at a house at the minute, and we suggested rent-to-buy to the builder. The only thing is, it's not gonna to be rent-to-buy exactly.
I realise the whole scheme is basically you get the option to buy the house after 3 years, but we're not looking for an option to buy....we're definitely gonna buy the house after 3 years! Everything about the house is perfect for us.
The house is a bare shell, so if/when we get the house, we'll be putting in the kitchen/wardrobes/fireplace/floors/etc. So we're gonna have a lot of our own money invested in the house, as well as (hopefully) having an emotional attachment after 3 years.

So I suppose after all that, what I'm wondering is...
1. Can you have a rent-to-buy scheme where the buyer guarantees to purchase the property after 3 years?
2. Are there any tax implications for either us or the builder if we go down this route?
3. Any other pitfalls/advantages that we should know about?

Thanks guys.

P.S. The only reason we're looking for an rtb scheme is, if we go the mortgage route, the 8% will take up all our €40k savings, so we'll have nothing left to furnish the place.

jobless

why not just rent for 3 years and then buy....?
rent to buy (if it goes by other rent to buy schemes) means you'll be agreeing a price to pay now for the house and a fixed rent for the term (from my limited knowledge of it). That doesnt make sense in a falling market of rents and sale prices.
I think you would be daft to do this.... its not like the house is that unique that you would not find something similar in 3 years time...

Soarer

Thanks for your reply jobless.

The "problem" with the house it's a new house, and since we're not first time buyers, we need to buy new so as to avoid stamp duty...probably shoulda mentioned that in the first post!
Another "problem" is we have a 13 month old, with hopefullly another newcomer arriving in the next year or so (God willing). So we don't really want to be uprooting them in a few years to move from the rented property.

jobless

oh ok...
i didnt realise if buy a new property and your not a first time buyer then you avoid stamp duty... are you sure about this?.
I know its not an ideal situation renting with kids... but i guess you need to trade this against how better off you may be by renting and then buying in a couple years... as the kid is quite young i dont think moving in a couple years would have that much affect on them.. would be different if they were in school..
As i said i think locking yourself into a price now is a mistake when you can buy cheaper in a couple years... but at least you are going into this with your eyes open..
tough choice....

Soarer

Unfortunately I'm 100% right about the stamp duty thing. We were hoping that they'd do something about it in the budget, but they didn't.

I guess what I'm really wondering is if there are any tax implications or financial pitfalls by going the rtb route, besides the obvious fall in house price?

Soarer

Afternoon all, and Happy New Year!

Can anyone tell me if there are any tax implications/benefits for either us or the builder by going the rent-to-buy route?
I've a feeling the builder in question will take our offer of the rtb early in the new year, and I'd like to know whether I'll get a nasty kick from Revenue once I've signed everything!

AARRRGH

I can't answer your question, but if you choose to rent for three years and then make an offer for the house, with the way house prices are going (and there isn't going to be a "recovery" for years) you will save yourself tens of thousands, perhaps hundreds of thousands, over the lifetime of the mortgage.

Rent-to-buy in a falling market is always a bad idea.

But assuming the above isn't important to you, I wish you luck in your new home.

wyndham

Soarer wrote: »

..........
The house is a bare shell, so if/when we get the house, we'll be putting in the kitchen/wardrobes/fireplace/floors/etc. .......

How can it be rent to buy? The house is not ready or suitable for renting. There are minimum standards that must be met by law for rental properties and if there is no kitchen or floors, then these are not met. Does the builder want you to complete the house for him?

In any case, I wouldn't feel comfortable with this kind of arrangement. Investing money in something that is not yours and locking yourself into a purchase agreement. What if the market has fallen another 40% in 3 years time? Will you walk away from the money, time and work you have invested in somebody elses' property?

If you want the house, buy the house. You should get a significant discount. Find the money elsewhere to complete the house over time.

ArseBurger

Soarer wrote: »

The only reason we're looking for an rtb scheme is, if we go the mortgage route, the 8% will take up all our €40k savings, so we'll have nothing left to furnish the place.

If you can't afford to buy with all the associated additional costs - don't.

Roisinbunny

ArseBurger wrote: »

If you can't afford to buy with all the associated additional costs - don't.

TBH we are hoping to sign our contract in a few weeks - we are using all our savings for the deposit. We have a small bit aside for 3 things we absolutely have to have - sofa, bed and kitchen table (we have bits and pieces collected over the years like kitchenware, TV etc) It will take another year to add to the house and make it feel more homely but we're just so delighted to have our own 4 walls after 10 years of renting.

Honestly Soarer, it already seems you have spent a lot of energy worrying about what might or might not happen so why not just buy it outright - it is then your very own and you can gradually add more and more to it and not wonder about what might happen in 3 years time? You also will have a lot of extra work in putting in kitchen, fixtures etc. It seems like an awful lot of effort for the risk.

I genuinely wish you the very best of luck and hope it works out for you either way.

hmmm

What sort of contract are you signing? Who will draw up the contract? How much of your 40k are you spending on legal fees?

Is a house that has been rented for three years still regarded as a "new" house? What are you basing your stamp duty calculations on?

Rent to buy usually means overpaying rent to the landlord and getting a discount on purchase. What happens if the landlord pockets your extra rent and disappears/goes bankrupt/can't repay it? Can the landlord increase your rent? What if he refuses to sell you the house in 3 years?

I agree with the others, wait till you can afford to buy and avoid huge complications.

the_syco

Soarer wrote: »

The "problem" with the house it's a new house, and since we're not first time buyers, we need to buy new so as to avoid stamp duty...probably shoulda mentioned that in the first post!

As the house will have been rented out for 3 years, will it still be seen as "new"?

Soarer

Thanks for all the replies/questions/advice guys, I really don't know where to start with my reply(s).

I suppose I'll start with the whole rent-to-buy thing. Like I tried to explain previously, technically it's not a rent-to-buy. We want to buy the house, and we'd gladly give the builder his new asking price (down €200k from previous asking!). The 8% would take up our savings though. So that's where I came up with the idea where we'd buy the house at the agreed price in 3 years time. That would allow us to kit the place out using our savings, and the 3 years "rent" would allow us to get a substantially reduced mortgage in 3 years time.
As for the other "bad news" posts...;)
TBH, I didn't think about half the pitfalls that have been mentioned. I thought, naively, that going this route would be "easy"...certainly easier than trying to get a mortgage.
I guess I/we have a lot more thinking to do!

@ RoisinBunny: Congratulations on your new house. Hopefully you'll have many trouble-free years there.

murphym7

Soarer wrote: »

Thanks for all the replies/questions/advice guys, I really don't know where to start with my reply(s).

I suppose I'll start with the whole rent-to-buy thing. Like I tried to explain previously, technically it's not a rent-to-buy. We want to buy the house, and we'd gladly give the builder his new asking price (down €200k from previous asking!). The 8% would take up our savings though. So that's where I came up with the idea where we'd buy the house at the agreed price in 3 years time. That would allow us to kit the place out using our savings, and the 3 years "rent" would allow us to get a substantially reduced mortgage in 3 years time.
As for the other "bad news" posts...;)
TBH, I didn't think about half the pitfalls that have been mentioned. I thought, naively, that going this route would be "easy"...certainly easier than trying to get a mortgage.
I guess I/we have a lot more thinking to do!

@ RoisinBunny: Congratulations on your new house. Hopefully you'll have many trouble-free years there.

Hey there Soarer, I may not be the best person to advise you as I am probably biased. I am just weeks away from signing a contract for a rent to buy property myself. This was definelty not something I was considering for a second but the right house (5 bed detach) came up at the right price (120k less than last year). My wife and I are about 18 months from having the full deposit, legal fee's furniture etc and pretty much the same as you have the bare deposit - not enough to buy outright. We are aware that we will be buying in 3 years time at todays price but as our family home I am willing to take the risk - we are in this for the long haul - hopefully. PM me if you want any details of what we are going through. My one bit of advice though is to go through a rent to buy agent and not directly enter an aggeement with the builder. These people do this everyday.

The_Conductor

Soarer- one complication of the rent-to-buy scheme is you are agreeing a price to pay for the property in 3 years time, however your eligibility for a mortgage will be reassessed in 3 years time at the then current market value of the property. So- if you agree to pay 500k today and qualify for an 85% mortgage (of 425) and subsequently pay 45k of 'rent' during the 3 years- bringing the price down to 455k but the property is now valued at 400k by the bank- your new max mortgage would be 340k- leaving you with a deficit of over 100k to make up.......

You may get the house for a reduced price in the 3 years by using a 'rent-to-buy' scheme, but keep in mind that in a falling property market (nationally its falling by ~1.2% per month)- your borrowing capacity is also falling.

Further- what is the status of the property at the end of the 3 years? Is it still considered to be a 'new property' by the Revenue Commissioners? If its not- there are also stamp duty implications to consider!!!

AARRRGH

Soarer wrote: »

we'd gladly give the builder his new asking price (down €200k from previous asking!)

You really need to ignore what the previous asking price was. Ireland 2005 - 2007 was a mental institution.

Can you tell us where the house is, how many bedrooms it has, and how much you are paying for it? We'll then be able to advise you if you're paying over the odds or not.

Soarer

I'd rather not give full details, as you never know who's watching!

But roughly speaking....
It's a 5 bed detached house, approx. 2300sq.ft., on approx. 1/5 of an acre in a "nice" suburb of Cork City. Good spec with the house ie. Ducon first floor, oak doors throughout, oodles of sockets, tv points in all but the smallest bedroom, etc. No kitchen/fireplace/wardrobes.
The previous house sold for €650k in '08, but with kitchen, etc.

He's currently looking for €500k, but we've been told that €450k will buy it as-is. We have €40k in savings, so that's just over the 8% needed for the mortgage, with very little left for the kitchen, etc.

What we were thinking with the rtb is agree to the €450k, give him €10k deposit and €1500 per month for 3 years. That means we'd have €30k to put into the house, and our mortgage in 3 years time would only be €386k.

See, isn't it all very easy!

As for whether or not the house will still be considered a new house after 3 years, I don't know. I'm imagining it would though, as the builder still owns it while we're living there, and we'd be buying from the builder in the future.
Not sure though.

the_syco

Soarer wrote: »

What we were thinking with the rtb is agree to the €450k, give him €10k deposit and €1500 per month for 3 years. That means we'd have €30k to put into the house, and our mortgage in 3 years time would only be €386k.

See, isn't it all very easy!

But if the bank thinks the house is only worth €300,000 (or less) in 3 years, how will you make up the difference?

Soarer

the_syco wrote: »

But if hte bank think the house is only worth €300,000 (or less) how will you make up the difference?

Maybe I'm being stupid/naive, but I can't see how the house will drop that much in the next 3 years. That would bring it down to just above current 3 bed semi prices, which would mean they'd have to drop to well below €200k in relation.

It probably is just me, but I can't see them dropping that much.

If someone has any sort of inside knowledge showing they will drop, I'll gladly listen to them!

The_Conductor

Soarer wrote: »

If someone has any sort of inside knowledge showing they will drop, I'll gladly listen to them!

Currently prices are falling 1.2-1.3% per month......?

markpb

the_syco wrote: »

But if the bank thinks the house is only worth €300,000 (or less) in 3 years, how will you make up the difference?

I could be wrong but I thought most R2B schemes had an optional purchase at the end so there shouldn't be any problems with people being forced to buy if they can't get the mortgage.

Soarer wrote: »

Maybe I'm being stupid/naive, but I can't see how the house will drop that much in the next 3 years. That would bring it down to just above current 3 bed semi prices, which would mean they'd have to drop to well below €200k in relation.

History shows repeatedly that properties drop hugely after a boom. Have a look at this chart showing property prices in Japan. As of 2004, they had fallen to 1979 levels, a drop of 56%. There's no reason to believe the same couldn't happen in Ireland, especially if unemployment continues at it's current (or higher levels).

Soarer

smccarrick wrote: »

Currently prices are falling 1.2-1.3% per month......?

Isn't that just the average from the peak to the trough of the slump? Does anyone/everyone really believe that that rate of devaluation can continue for the next 3 years? Or even the next couple?

AARRRGH

I reckon you'll save yourself at least 100k if you wait 3 years. That's 100k + interest which is at least 200k.

That's a lot of money...!

You have to remember that house prices in Ireland are still way overpriced.

Buy if you want though. Just make sure you're not making an emotional decision.

Soarer

AARRRGH wrote: »

I reckon you'll save yourself at least 100k if you wait 3 years. That's 100k + interest which is at least 200k.

That's a lot of money...!

You have to remember that house prices in Ireland are still way overpriced.

Buy if you want though. Just make sure you're not making an emotional decision.

You really think it'll drop that much?

Not to insult you in any way, but are you in the property game? I'd like to know why/how you think the way you do.

The_Conductor

Soarer wrote: »

Isn't that just the average from the peak to the trough of the slump? Does anyone/everyone really believe that that rate of devaluation can continue for the next 3 years? Or even the next couple?

The rate has slowed- certainly, however, month on month prices are still falling 1.2-1.3% This is annualised at just under 20% (for 2009).

The real falls will begin to occur once interest rates go up again (as they are expected to in Q4 2010 or Q1 2011).

Ps- no, I'm not in the property game- just interested in it.

S.

Soarer

smccarrick wrote: »

The real falls will begin to occur once interest rates go up again (as they are expected to in Q4 2010 or Q1 2011).

I guess that's the real catch22 right there.
Get a mortgage now and go for it, even though the house price(s) will probably fall further, or wait until the house prices fall, but interest rates are gone up.

AARRRGH

Soarer wrote: »

You really think it'll drop that much?

Not to insult you in any way, but are you in the property game? I'd like to know why/how you think the way you do.

I'm just interested in property/economics. I accept of course I could be totally wrong, but I think it is unlikely. Ireland is ****ed.

Soarer wrote: »

I guess that's the real catch22 right there.
Get a mortgage now and go for it, even though the house price(s) will probably fall further, or wait until the house prices fall, but interest rates are gone up.

If you buy now you'll still have to pay the higher interest rates eventually.

Soarer

AARRRGH wrote: »

If you buy now you'll still have to pay the higher interest rates eventually.

True.
But it's probably that bit easier to get a mortgage these days with the interest rates being so low.

AARRRGH

Soarer wrote: »

True.
But it's probably that bit easier to get a mortgage these days with the interest rates being so low.

And it's probably easier to get a mortgage when the house price has dropped.

Agent J

Soarer wrote: »

True.
But it's probably that bit easier to get a mortgage these days with the interest rates being so low.

Rates will not stay low. Another 9-12 months tops before the rates start going up.

Once that happens the mortgage availablity will drop(As well as pushing a lot of people to the wall ) putting more availablity on the market then leading to a further drop in prices.

oceanclub

Soarer wrote: »

Get a mortgage now and go for it, even though the house price(s) will probably fall further, or wait until the house prices fall, but interest rates are gone up.

You do realise that if you get a mortgage now, you will still have to eventually pay the higher rates?

P.