Vendor terms or ‘rent-to-buy’ schemes promise to help you buy property when you don’t have the income, savings or credit history to get a regular mortgage. Often there’s a broker or agent who advertises the property and makes the deal. These deals can cause major financial problems for you as a buyer or seller.
Vendor terms or ‘rent-to-buy’ schemes are very high risk – whether you’re a buyer or seller.
What are vendor terms and rent-to-buy schemes?
The details of these arrangements generally follow a similar structure. Under vendor terms deals (sometimes known as ‘instalment contracts’, ‘terms contracts’ or ‘vendor finance’ sales), you agree to a sale price then pay a deposit and regular instalment payments to the seller. Under rent-to-buy deals (sometimes known as ‘lease-to-own’ or ‘lease plus option’) you pay much more than market rent, or market rent plus an ‘option fee’ for a set rental period, then at the end of the lease you can choose to buy the property. Both of these deals are also promoted under other names, like ‘sweat equity’, ‘handyman special’, ‘deposit builder’ or ‘seller loan’.
Under both of these schemes, you don’t legally own the property until all payments are made, and the legal rights of both you and the seller can be unclear or very limited.
These deals continue to be legal in most states. However, in South Australia, vendor terms deals are void (so they are not legally binding) and, as a buyer, you can choose to end rent-to-buy deals. If the deal is avoided (ended), you can try to have some, but not all, of the money you paid refunded.
Risks for buyers
The risks to you in rent-to-buy deals are huge. Most people who come to Consumer Action for help say that they would’ve never signed the contract if they really understood it.
Get advice from an independent lawyer and accountant. Do not rely on advice from the person selling you the property, their agent or lawyers who they recommend.
- You are not the legal property owner until your name is registered on the title. This will generally not be until you’ve paid the total price, the owner has handed over the title documents and these have been registered at the titles office.
- You could pay much more for a property than it is really worth. If you lock in a price which ends up being more than its ‘market value’, it could be a major problem if you try to get a mortgage to buy the property. You might also have to pay for council rates, home insurance, repairs, maintenance and other costs which are normally paid by a home owner, not a tenant.
- You could lose a lot of money if you have difficulty making the payments. You usually won’t have the usual protections that you have with a mortgage from a bank. You could end up owing a lot in extra payments and default interest rates. You may be forced to vacate the property if you cannot do what you agreed to.
Risks for sellers
- You could lose control of your property. If you to enter into a ‘joint venture’ agreement which gives the broker rights under a power of attorney to deal with the property, they may be able to sell or rent out your property to anyone at any price on any conditions without your approval or knowledge. If you’ve got a mortgage over the property, you’ll be responsible for making payments even if the purchaser doesn’t pay. This could mean you get stuck with default interest and fees, or even lose the property altogether if there isn’t enough income to pay the mortgage.
- You could be charged a lot of money. If you agree to give the broker fees, the buyer’s deposit and/or part of the buyer’s ongoing or final payments, you could end up which much less money from the deal than you expected.
We want to hear your stories
We would like to hear from you if you’ve had problems with selling or buying a property in a vendor terms or rent-to-buy deal. To get in touch, please email firstname.lastname@example.org.
If you need further help and you live in Victoria you can contact us for legal advice. If you are outside of Victoria, you can contact someone in your state for assistance.
Consumer Action Law Centre
Telephone: (03) 9629 6300, or 1800 466 477 for country and mobile phone callers.
You can also use our online form to send us an email.
Photo from Peter Curb.