It’s no secret that I’ve never been a fan of Lease/Options (Rent To Buys) but sometimes I wish I had something similar.
Less Protection for the Purchasers
From the Purchasers’ point of view, I’ve never been able to understand why home buyers are protected by the National Consumer Credit Protection Act when they buy their home with a Credit Contract but get no such protection when they ‘buy’ their home with a Lease/Option.
Less Protection for the Vendor Financier
Considering the large number of different rulings against Vendor Financiers from various Tribunals around the Country, I’m surprised anyone continues to write Lease/Option paperwork. A couple of the ‘different rulings’ mentioned above have included:
- Declaring the Lease/Option to be a credit contract and sending the case off to the Supreme Court;
- Ruling that the Vendor Financier had to refund everything the purchaser paid that was over and above market rent. Not a good place to be if you were the vendor financier and the transaction had been running for a number of years!
Let’s face it, the various authorities around Australia just don’t like Lease/Options. And, in some cases, this can be understood as Lease/Options have been used to avoid the consumer protections inherent in Credit Contracts.
I’ve got a Possible Buyer but I Can’t Prove Serviceability
My move towards ‘something’ other than a Lease/Option stated in Victoria in 2014. I had a property in Southeast Melbourne I couldn’t find a suitable buyer for. So I decided to rent it for 6 months and try again later.
Just as we were about to list the property for rent a potential buyer appeared. She was less than a stellar prospective buyer and we couldn’t ‘prove’ her serviceability under Responsible Lending requirements.
But, like most prospective buyers J she claimed she could afford it. What to do?
We Made Her an Offer
We contemplated trialling her on a Lease/Option for 6 months but we decided against that for two reasons:
- Stamp Duty is immediately payable on Lease/Options in Victoria, and
- Our dislike of Lease/Options generally, as evidenced by some very ‘interesting’ rulings by VCAT in cases involving Lease/Options.
If we had sold this property to this prospect with an Instalment contract, her weekly instalment payment would have been $434. To enable her to prove she could ‘service’ $434 per week we allowed her to rent the property for 6 months at $310 per week. This was the suggested market rent from the property manager.
She also agreed to open a Building Society account, in her name only, and deposit $124 per week into that account.
If she made both payments for 26 weeks she would ‘prove’ her serviceability and we would have offered her an Instalment Contract purchase. She found out quite soon that she couldn’t afford the extra $124 per week but continued to rent the property for the full 6 months.
She kept all the funds she deposited into the Building Society account. Not a great result for us financially but happily there weren’t any fights over who got the ‘extra’ Building Society deposits.
A Better Result in 2015
A similar situation turned up recently with a house in the Lower Hunter Valley region. Except his time the prospects are self-employed and I’m very confident they’ll ‘prove’ serviceability. They’ve been going well for 10 weeks, so keep your fingers crossed J
A Little More Formality
In 2014, we were making it up as we went and nothing was put in writing. This time the prospects and I thought it would be good to outline what we are working towards in a Memorandum of Understanding.
Financially the procedure described here has disadvantages, e.g. our first try in South East Melbourne. However, if our second try in the Lower Hunter goes well, we’ll get access to those Building Society funds as part of the prospects’ Deposit payment for the Instalment Contract we’ll offer them. You lose some, you win some J
And we get to keep right away from Tribunals that have a negative opinion of Lease/Options.
Vendor Finance Management
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