Banks' beefed up home equity rules have sparked a surge of interest in rent-to-buy schemes from would-be homeowners who have good cash flow but can't stump up with a 20 per cent deposit for a mortgage.
In these agreements, a tenant rents a property typically for three years; during or at the end of which they have an option to buy it for a price fixed at the start of the term.
Those in the property industry who provide them say they are win-win arrangements that help prospective buyers into a home.
Auckland-based property investor John May says he recently ran an open home on a rent-to-buy property in Remuera that attracted 30 potential buyers through putting an ad in the paper and a sign out, while a house in the next street being sold traditionally through a real estate agent got no one through the door.
He subsequently ran two more open homes and drew 50 more prospective buyers. And demand is growing, he says.
Rising rents are increasing the appeal of the rent-to-own concept, says market-watcher Kieran Trass.
Director of Rent 2 Own NZ, Grant Clifton, says his company is getting "a lot more" inquiries - and the prospective buyers have deposits of 5 to 10 per cent. A year ago, most of them had only minimal deposit amounts saved "and they usually had bad credit, so it was the only way they could buy".
Lawyer Tim Jones of Glaister Ennor says the schemes are another version of a strategy used in the 70s and 80s called long-term agreements for sale and purchase; where a buyer who couldn't afford to buy a property outright contracted with the vendor to settle on a future date; up until which they would make partial payments in reduction of the price.
At the time banks wouldn't lend unless purchasers had a substantial deposit and savings history.
Now, banks are again requiring a certain equity level, and rent-to-buy schemes offer an alternative entry to a property, Jones says. But "often the vendors escalate the price to buffer the timeframe" between when the agreement is signed and when it is settled.
On the other hand, they can be beneficial for the buyer because the price is fixed irrespective of whether the market value is higher when settlement time comes.
"Some people like the certainty of rent-to-buys, while some people think they have enough discipline to save the money themselves and want to be able to play the market," Jones says.
"So they'll rent from a landlord, save the difference and make sure they've got a 20 per cent deposit saved. The danger is that the market takes off - and that's where a lot of people have gone wrong in the past 15 years; because they can't possibly keep up. Savings aren't enough to keep up with inflation - let alone save a deposit."
Signing up to a rent-to-own contract on an average $400,000 property would not necessarily cost the buyer more than if they continued to rent accommodation under a standard tenancy agreement while saving a 20 per cent deposit to get bank finance, May says. He estimates the property trader makes a margin of $20,000 to $40,000.
Trass says whether a prospective buyer is better off renting or signing up to rent-to-own depends on what point in time this is assessed.
Currently it is cheaper to rent - but falling interest rates will help to change the balance.
You pay a premium above market rent for the option to purchase, financial advisor Lisa Dudson says.
However, a good property trader will secure and pass on a better price to the ultimate buyer than they could negotiate themselves.
Another advantage of rent-to-own agreements is getting into your own home "right from day one," rather than potentially having to move under standard tenancy arrangements.
"You can start doing work on the place, rather than having to wait three or four years until you can save up a deposit," she says.
It's not just about "the numbers," says Dudson - those who offer rent-to-buy schemes "offer a solution for people and hold their hand through the process," in some cases including helping them apply for a bank loan when the time comes.
Kiwibank's Bruce Thompson says that he has seen agreements where the purchase price was overly inflated and advises buyers considering entering a rent-to-buy contract to look at the government's Welcome Home or shared equity schemes as alternatives.
The state schemes, administered through Housing New Zealand, help those with a good income stream but no savings to use what they're paying in rent for a mortgage on a house.
Understanding the scheme
In the property industry rent-to-buy schemes are known as lease options or sandwich lease options.
In a lease option, the owner rents a property to someone who wants to buy it once they have saved the deposit. The price is usually the market value at the start of the tenancy.
With a sandwich lease option, a property investor rents a house and agrees to buy it on a future date. They then let it to another tenant with an option to buy. The tenant pays a higher than average rent - part of which goes towards their deposit. Generally the tenant forfeits deposit funds if they don't exercise the option to purchase.
Property adviser Kieran Trass says: "The investor is taking a risk because they are guaranteeing that they will pay the owner rent - whether or not they have a tenant and whether rents go up or down". Lawyer Scotney Williams says there are difficulties with option to purchase agreements coexisting with tenancy agreements. The Tenancy Tribunal doesn't have jurisdiction to look at issues such as rent defaults.
"The moment the tenant-purchaser defaults, they just pose massive problems for the vendor."
Director of property consultancy Catalyst2, Tanya Kwasza, advises property traders to offer rent-to-buy deals as a way out of "leverage lock" - where a bank won't lend more funds until cash flow improves. There are advantages for the buyer, too.
"You're in a legal contract and you're going to think twice about buying that extra coffee or going on holiday, because you're on a mission to save for your home deposit. It's a compulsory savings scheme."
IRD looking into arrangement
A stoush is brewing with Inland Revenue that industry veterans say will close option to purchase arrangements down.
Hamilton accountant Ross Barnett says his client is facing a test case over how the Inland Revenue will treat GST liability when a rent-to-own scheme is signed. Usually a trader buys a property with the intention of reselling it, so claims GST on the purchase, and pays GST on the resale profit.
If the trader finds a buyer who wants to rent-to-own the property, they account for GST on any amount paid toward the purchase price. When the tenant opts to buy, GST is returned on the sale price less the amounts already paid.
But Barnett says the Inland Revenue is signalling that GST is payable on the entire sale amount when the rent-to-buy agreement is signed. "This would basically stop people doing lease options."
An Inland Revenue spokesperson confirmed to the Herald on Sunday that if the arrangement provided that part of the rental payments would be put toward the purchase price of the property, then it is likely that the property trader would need to account for GST "on the entire price of the property as soon as they receive any payment toward the cost of the property. This will be the case even if the amount of rent paid is not sufficient to cover the cost of the GST."
Barnett says the hard thing for developers or traders is that they're dealing with an option. "Fifty per cent of them would probably fall over... so they end up paying GST when no actual sale occurs."
Auckland-based property investor John May says years ago, Inland Revenue took a similar stance with the predecessors of rent-to-buy agreements and it "killed the industry overnight". Inland Revenue's current stance will have the same effect with today's lease options.
Vendors will have one less way of selling a house in a tight market, and buyers one less chance to try to qualify to own a property, says property adviser Kieran Trass, who believes Inland Revenue's view will contribute to the country's falling home ownership level.
In the meantime, director of the New Zealand Property Traders Association Ashley Church says traders should consider the new tax approach when providing future rent-to-own deals and get advice from their tax advisor on their current agreements about potential GST liability and the time at which it's likely to arise.