Tenant Buyers are interested in renting out property and then buying it at a future date once they are able to get a mortgage. As they plan to live in the property long term, they make perfect tenants. They also pay above market rent to cover their eventual deposit and most are able to pay 2-5% of market value upon moving in. These schemes are known as Rent to Own or Rent to Buy Schemes and are becoming more available on the market today as the lenders tighten up on their lending criteria.
We like to help individuals, couples and families onto the home ownership ladder as swiftly and painlessly as possible. First time buyers, self-employed people, people without a credit history or who need to re-establish one, investors interested in renovation looking for a house to fix up, we can match you to a property in our area.
We help tenant buyers to find the house of their dreams, put a plan in place that builds up the deposit towards the mortgage and wrap it up in a legally binding contract. The house will belong to the tenant at the end of the agreed period providing that the payments have been maintained. The tenant can even redecorate, undertake building improvements or remodel the garden (with prior approval from the owner) during the tenancy period.
Key features of Tenant Buyer Agreements:
- Move in without the need for a mortgage
- Low deposit required – typically 2-5%
- The purchase price is fixed from the outset
- The Tenant Buyer can buy the property over a timescale to suit – usually within 3 years
- The Tenant Buyer can move in quickly
- Gets you on the home ownership ladder
- The buyer gets the benefit of any increase in the property’s value
- No obligation to buy if circumstances change
- Solicitors deal with the transaction just like a traditional house purchase
How does it Work?
The Tenant Buyer signs a standard Shorthold Tenancy Agreement and an Option to Purchase Agreement. The Option Agreement gives the tenant buyer the right to buy the house at the fixed price agreed at any time in the extended purchase period. When the buyer gets a mortgage offer and can complete the purchase, the option is simply exercised and the solicitors finalise the transaction.
The Tenant Buyer pays an initial low deposit and then pays an additional option payment over and above the market rent. This additional sum goes towards building up the deposit that will be required by the eventual mortgage lender. It is not essential for the Tenant Buyer to use a solicitor before signing the tenancy and option agreements but it is necessary for completing the actual purchase.
What are the likely costs to the Tenant Buyer?
A typical application fee in the industry is £500 which is charged when agreement has been reached on the terms of the lease option. If the Tenant Buyer chooses to use a solicitor to look over the arrangement, then their fees will need to be paid. There is also a requirement to pay two month’s rent in advance.
What happens if the Tenant Buyer cannot keep up their payments?
The Tenant Buyer would risk losing their right to exercise the option to buy the house if they fall more than 2 months behind in their payments. They also risk losing all the option fees that they have paid. Legal proceedings would then begin to gain possession of the house.
What if the Tenant Buyer changes their mind?
The Tenant Buyer does not have to buy the house at the end of the option/rental period. If circumstances change, the Tenant Buyer simply moves on. However the option fees will be forfeit.
An example of how it works.
Mr & Mrs Smith have a small deposit, no credit history and are finding it difficult to find a lender that will give them a mortgage at an acceptable rate of interest. They see a house they would like to live in that is on the rental market. The landlord is happy to sell it to them over a period of time in the expectation that the lenders will be able to provide a mortgage to the Smiths once they have established a credit history in say 4 years time.
The arrangement would look like this:
- Today’s market valuation of the property is £150,000
- A purchase price is agreed for four years time at £155,000We will show you available properties in your area. If you want to go ahead, we will be happy to consider you for our programme, and discuss whether Rent 2 Own suits you.
- They pay £5000 up front as the initial deposit
- The market rent for the property is £600 per month – this is fixed for the 4 year term
- They agree to pay an additional £250 per month as option fees
At the end of the term, the account would look like this:
- Purchase price – £155,000
- Deposit received – £5000
- Option fees received 48 x £250 = £12,000
- Outstanding to owner – £155,000 less £17,000 = £ 138,000
- Purchase Price in 4 years time – £155,000
- There is 10.97% deposit in the property (£155,000/£17000) so a 90% mortgage is achievable
- The property may well be worth more in 4 years time so the Smiths gain extra equity