Alan Hartstein
Athena Cocoves
Housing affordability in Australia has been at near-crisis levels for years now, and this continues to be the case in some locations, despite modest falls in booming markets such as Sydney and Melbourne over the past six months. Younger people and higher-income earners may find it especially frustrating that they can’t gain a foothold in the property market, despite employment stability and good credit history, simply because they can’t save up a deposit.
Common issues like these are inspiring some to turn to other solutions, such as rent-to-own home schemes.
How to spot rent-to-own scams
Rent-to-own home schemes, also called rent-to-buy schemes, may seem like a great idea, especially if you’ve been unsuccessful in obtaining a home loan through more conventional channels and you’re sick of renting, which can seem like throwing money down the drain. A rent-to-own contract can also help you pin down a price in a period of rapidly rising real estate.
So, what could possibly go wrong? You probably don’t need to apply Murphy’s Law to most real estate transactions but rent-to-own schemes may just be the exception.
Familiarise yourself with common rent-to-own red flags
First and foremost, there is a minefield of scams out there designed to separate you from your hard-earned cash. Differentiating legitimate solutions from fake ones may be difficult if you’re unprepared.
There are several types of rent-to-own scams, like the one where scammers try to sell you a property they don’t actually own. This usually involves the scammers finding a vacant house then listing it for rent with the promise of a sale and taking upfront fees or some type of non-refundable deposit from the unsuspecting renter/buyer.
Watch out for predatory pricing models
But, even if the seller does own the home, the deal can be a very poor one because of the condition of the property, the house could be in the midst of foreclosure, or the seller may simply be asking for way above the market value.
Additionally, legitimate operators are also known to follow predatory pricing models similar to those found in the US. Some providers will shamelessly charge up to twice the average rate for rent for the rental period of the contract. [1]
» MORE: Should you buy or rent?
Steps you can take to minimise risk
Rent-to-own schemes are relatively new in the Australian marketplace and are touted as a realistic alternative to getting into the property market without the need for a deposit. If you’re considering a rent-to-own scheme, make sure you take steps to minimise the risk.
Make sure the price is fair
With rent-to-own schemes, there are two main elements the buyer needs to be aware of — the rent being charged over the rental period and the cost of the property (the agreed-on sale price).
With regards to rent, it’s easy to see what the average price is in your area and to find similar properties online for comparison. Likewise, with the asking price, it’s easy to tell if you’re being ripped off right at the outset of the process.
Establish the legitimacy of the seller
Once you’ve been given a price and had a building inspection to ensure there are no nasty, hidden surprises, you’ll need to establish the legitimacy of the seller beyond a reasonable doubt. This should be a fairly straightforward process because legitimate financial companies have websites and a plethora of other information about them available.
For peace of mind, using one of the larger providers might be better. Your solicitor should also obtain a title report that ensures that the seller is the owner and can legally sell the property to you well before you sign any contract.
Crunch the numbers
Before you even get to the contract stage, however, you’ll need to do some serious number crunching to see how much that $500,000 property you’re buying in three years is really going to cost you. After factoring in a potentially oversized rental commitment and a raft of other fees and charges, that $500k property ends up costing you more than $650,000, for example.
Thoroughly review the contract with a solicitor
Unfortunately, because the market here is so new, what is contained in contracts is still somewhat of a legal grey area.
A 2016 study by the Victorian Consumer Action Law Centre[2] couldn’t identify a single successful case of a rent-to-buy scheme.
The report stated that the contracts often made it nearly impossible for the buyer to make the repayments and that the risks associated with these schemes far outweighed any rewards.
In 2019, the Victorian government enacted laws prohibiting some of the more predatory behaviour associated with these contracts to protect buyers from price gouging and scams. The rule changes prohibit certain rent-to-buy arrangements, with significant penalties for vendors and third-party intermediaries to act as a deterrent, according to Consumer Affairs Victoria[3].
Rent-to-own contracts can still contain nasty surprises though, such as the harsh penalties for late payments, and in some cases even the voiding of the contract, meaning you lose everything you’ve invested up to that point if you miss a single payment for whatever reason.
Make sure you go over the contract thoroughly with a solicitor who understands the nature of these contracts and preferably some type of property expert who would be able to spot any hidden surprises.
Know your rights and what to do if you get scammed
You should also familiarise yourself with your rent-to-own legal protections and what rights you have if you have been scammed.
Information about your legal rights and options is available on the Australian Competition and Consumer Commission’s Scamwatch website, including how to report an incident and get help.
Additionally, if you think you may be a victim of a rental scam, you should talk to your bank and the police as quickly as possible and contact your state’s Consumer Protection office, like Fair Trading in NSW.
Article Sources
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Jenman Real Estate Support, “Rent to Buy Schemes are Dangerous Scams,” accessed March 14, 2023.
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Consumer Action Law Centre, “Fringe dwellings: The vendor finance and rent-to-buy housing black market,” accessed March 14, 2023.
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Consumer Affairs Victoria, “Sale of Land Amendment Act 2019 – Legislation update,” accessed March 14, 2023.
About the Author
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