Forums / Property Investing / Creative Investing / Can a rent to buy tenants who is in the lease-option get finance ?

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  • Profile photo of CrisCris
    Participant
    @cristineyang
    Join Date: 2016
    Post Count: 10

    hi all

    If a rent to buy tenants who is in the lease-option contract, do they get the finance thru the financial institutions like normal buyers do (like u get 80% of money lended to u thru evaluation of the house?) If the answer is yes, then does it mean that a lease-option contract makes no difference to a normal sales contract in terms of borrowing money from the financial institution?

    Also my second question is, when a house owner grant me a lease option contract,lets say a 5 year lease on a $500K house, meaning that i have the option to buy the house anytime within 5 year. But the Title of the house is still the seller’s and not mine until i purchase the house. Here, Can the seller still refinance on this $500K house(provided that it still has equity) before i actually own the house then? if yes, then what can i do in order to protect my rights? I certainly want the house has the same amount of equity when i m ready to buy the house compare to the starting date of my lease.

    Your answers or comments to my questions are highly appreciated, thanks a lot

    Cris

    Profile photo of huilohuilo
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    @huilo
    Join Date: 2015
    Post Count: 21

    first question, yes all you’re doing is saving a deposit which you can then show a bank to get traditional finance. i would assume only 2nd tier banks would allow this as general savings i don’t think the big4 would allow this as a deposit.

    2nd question you would register a caveat over the property which wouldn’t allow the vendor to sell / refinance the property.

    Cheers,

    Profile photo of CrisCris
    Participant
    @cristineyang
    Join Date: 2016
    Post Count: 10

    hi huilo

    thanks for your reply. As for the first question’s answer, when u mentioned saving a deposit then show to a bank to get the finance, and assume that only 2nd tier banks would allow this as deposit, the deposit that u mention here do u mean the premium rent that the seller asked for from the rent to buy tenants? lets say a 5 year lease option on a $500K house, usually they will ask for a premium rent of maybe 5 or 10% of the sale price say $25,000 before the rent to buy tenants to move in? so do u mean when i paid the $25,000 as the premium rent to the seller, can this be a proof of the deposit to show to the bank to get traditional finance or do i still need to have extra savings in my account in order to get the finance approved?

    and as for 2nd question, a caveat registration for restricting the vendor to sell/refinance the property, the not allowing the vendor to refinance is understood. but as for the selling part, isn’t the lease option already means that the seller has to sell to me within the lease period? if i put a caveat to restrict the vendor to sell as well, is it overlapping or is it also an important component as well? for i m new to this n i don’t understand how this lease option is working. thanks a lot again for answering Huilo.

    Cris

    • This reply was modified 3 years, 1 month ago by Profile photo of Cris Cris.
    Profile photo of huilohuilo
    Participant
    @huilo
    Join Date: 2015
    Post Count: 21

    Hi Cris,

    it depends you may have had to pay a 25k deposit to get into the house / rent to buy deal. what % of that comes of the purchase price i wouldn’t know you would have to read the agreement.

    the caveat just means you have a interest in the property. i’m not a lawyer. i’d assume once you have the deposit and can get finance you would just proceed to settle. and the lawyer would take care of the caveat issue.

    do you mind me asking are you looking to buy on a rent to buy?

    • This reply was modified 3 years, 1 month ago by Profile photo of huilo huilo.
    Profile photo of CrisCris
    Participant
    @cristineyang
    Join Date: 2016
    Post Count: 10

    hi Huilo

    thanks for your prompt reply. I m looking to get into the lease option business but want to know the business from all perspective, e.g. how does the rent to own tenants get their finance in this case? since a rent to buy tenants are not able to buy a house thru the normal channel due to not enough money for deposit and they can’t get the finance thru the bank, i was wondering in this way, they are not limited by the big amount of deposit that they have to pay, because the bank is not the mortgagee of the house anyway. however, just because the bank is not acting as the mortgagee of the house, when the rent to buy tenants show them the rent to buy deal they have signed and the deposit that they have already paid, will the bank still approve the finance in this case?

    Cris

    Profile photo of TerrywTerryw
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    @terryw
    Join Date: 2001
    Post Count: 16,110

    When the tenant wants to buy the property (ie become legal owner) they would apply to a lender, just like normal. But the lender will need to know the details such as they have been paying extra rent which goes towards a deposit and that they will be buying under market value. These sorts of things are difficult to finance unless the LVR is under 80%. Tenants will still have to prove income and demonstrate serviceability etc.

    A person taking an option over a property has a caveatable interest so they can lodge a caveat. This will show everyone that they have an equitable interest in the property. The owner could try to refinance or increase loans etc but any prospective lender will see the caveat and be unlikely to lend while it is in place. You would also contract with the owner that they cannot increase the loan.

    Incidently the owner would be in breach of their mortgage agreement if they allowed a caveat to be lodged.

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
    http://propertytaxbook.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of CrisCris
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    @cristineyang
    Join Date: 2016
    Post Count: 10

    hi Terryw

    Thanks a lot for the comprehensive answer.So if in that case, can they get LMI so that they can get extra finance? if yes, how much more they can get if thru the LMI?

    Millions of thanks again

    Cris

    Profile photo of TerrywTerryw
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    @terryw
    Join Date: 2001
    Post Count: 16,110

    last time I tried finance for one of these was over 10 years ago and the mortgage insurer would not allow the loan on valuation. They also didn’t recognise the extra rent payments as a credit for the tenant.

    But these days many lenders lend based on the valuation where the contract of sale is has been exchanged more than a year ago for off the plan type sales.

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
    http://propertytaxbook.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of DeanneDeanne
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    @deanned
    Join Date: 2016
    Post Count: 7

    Hi Cris, I buy/sell and teach how to do Lease Options. One of my tenant/buyers settled on his property in July, getting a 95% loan. Another tenant/buyer of mine has just received pre-approval. This was through Liberty.

    A very important part of making this successful is to qualify your tenant/buyers properly – I use a mortgage broker for this. You need to know how long your applicant needs to be able to move into a loan and base the length of your Lease Option around that.

    Hope that helps,

    Deanne

    Deanne | Creative Property Academy
    http://creativepropertyacademy.com.au
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    Profile photo of Robert KingRobert King
    Participant
    @robertking
    Join Date: 2016
    Post Count: 13

    Hi Cris,
    I am also looking at providing potential owners with a Lease Option or Vendor Finance to purchase(build) their first home.
    Currently I have 1 family I can help but once I have successfully established this agreement, I hope to replicate with others.

    I plan to purchase/build a house and land that suits the families wants.
    First home and building means the stamps will be lower in Vic.
    Buyer will pay me/refund the acquisition costs for the property(my deposit, stamps, legals, Service Fee??)
    I will then either add a margin to the my mortgage on this property. (if I secure 5% interest rates, they will pay me 7% for example)
    Buyer will be responsible for all outgoings/repairs.
    As for the exit, I am unsure.
    Either I will continue this until the mortgage has ended in 30 years after which the buyer will take ownership(and pay stamps….again)
    Or, we create an option for them to gain finance after 10 years to buy at an agreed price?

    As you can see I only have a very loose concept and welcome any further discussion and guidance.

    Have you had much success in understanding how to structure yourself as the seller to minimise tax/legal implications?
    Are you using a “template” contract for this type of agreement(noting all agreements would be negotiated separately)?

    I am interested in hearing from you as I have only begun this journey myself and it has only developed from seeing an associate need this service to get in to home ownership(and of course myself looking for creative investing opportunities).

    Hi Deanne,
    I am also interested in any advice you maybe able to provide in this process?

    Thanks and look forward to further discussion.
    Regards

    Profile photo of Paul DobsonPaul Dobson
    Participant
    @pauldobson
    Join Date: 2003
    Post Count: 1,196

    Hi Robert

    As you are leaning towards Victoria it may be best to utilise an Instalment (Terms) Contract for the on-selling of the property you buy/build. This is because VIC is unique in that it doesn’t charge Stamp Duty until the Contract of Sale “settles”. In other States, Stamp Duty is payable within a number of days after “exchange of contracts”.

    Also, unlike all other States, VIC charges Stamp Duty on Lease/Options the day they come into being.

    As for your exit strategy, it’s worth noting that ASIC dislike “balloon” payments in the consumer space. See https://vendorfinanceinstitute.com.au/should-all-home-buyers-get-national-credit-code-protection/ We usually provide 30 year Instalment (Terms) Contracts to our buyers. Thereby avoiding the need for balloon payments. However we find most of our buyers refinance into a traditional home loan between years 4 to 7.

    For us “template” DIY legal paperwork is a huge no no. Not only do we always use a lawyer to draw up the legal paperwork, we will not sell to a buyer that will not get independent legal advice. See https://vendorfinanceinstitute.com.au/the-risk-in-relying-on-template-documents/

    A few other tips are available at: https://vendorfinanceinstitute.com.au/10-vendor-finance-mistakes-to-avoid-in-2016/

    Cheers, Paul

    Paul Dobson | Vendor Finance Institute
    http://www.vendorfinanceinstitute.com.au
    Email Me | Phone Me

    An alternative way to finance your home.

    Profile photo of DeanneDeanne
    Participant
    @deanned
    Join Date: 2016
    Post Count: 7

    Hi Robert,

    I have never purchased or done a lease option on a house that suits a particular purchaser. If I am purchasing a house to onsell with vendor finance then I have a simple checklist – 3/4 bedrooms, 1/2 bath, nice house close to schools, public transport etc. That way I will have a large list of prospective buyers to choose from, not just one particular purchaser. This is partly because if they change their mind, or don’t qualify, I don’t want to get stuck with a house that they like and I can’t onsell. I always find the house BEFORE I find the buyer.

    As a first step I would suggest you have a chat to a lawyer who understands vendor finance so they can advise you on what type of deals work best in your State. I say this from personal experience because whilst I live in Tasmania, I do most of my lease option deals in NSW where there is no stamp duty on the Option. Here in Tasmania it is the same as Victoria and there is a double dip – stamp duty upfront on the option, and then stamp duty when the purchaser settles on the property. It is easy to get caught as the rules can be very different.
    Paul Dobson is correct that Instalment Contracts might work better than a Lease Option (rent to buy) for you in VIC, due to the stamp duty issue, but there is always the chance that you will come across a deal where the cost is worth it, so it helps to understand how they both work.

    Lewis O’Brien (Phone: 03 9888 6388) is a lawyer who understands vendor finance and would be a good place to start. The Vendor Finance Association also holds meetings quarterly in VIC and that would be a good place to go and talk to people who are doing what you want to do.

    Just doing those few things should help clarify for you what strategy you want to do.

    Secondly, NEVER try and do your documents yourself. I always get a lawyer to do my documents – I get the buyer to pay for them (direct to my lawyer). It is just not worth the risk for any of the parties involved.

    Thirdly, get a good accountant who understands vendor finance – you will probably need to do some research. I live in Tasmania and my accountant is in WA, but he understands everything I do and it works fine.

    In regards to how you set up your deals, you will be directed by what is allowed in your State. For example, you cannot pass on the costs of maintenance and repairs with a Lease Option in NSW, so just make sure you understand what you can and cannot do.

    Let me know if you have any questions. If I don’t know the answer, I will be able to point you in the right direction.

    Regards,
    Deanne

    Deanne | Creative Property Academy
    http://creativepropertyacademy.com.au
    Email Me

    Profile photo of HancockHancock
    Participant
    @benhancock
    Join Date: 2016
    Post Count: 4

    Hi all, I just signed up to property investing and just found this post sorry I’m late! thanks in advance for any replies.

    I noticed Terryw said “Incidently the owner would be in breach of their mortgage agreement if they allowed a caveat to be lodged” does this mean if I were to enter into a “lease agreement with option to buy” with someone still in a mortgage agreement (and can this be done?) would I be at risk of them refinancing seeing I cant lodge a caveat?

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,110

    It means if you are the owner and mortgage the property you promise, as mortgagor under the mortgage agreement, must prevent people from lodging caveats. If someone lodges you must do all you can to have the caveat removed.

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
    http://propertytaxbook.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

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