Rent To Own
Newsflash - Rent-to-buy is
back in vogue for selling property
Rent-to-Buy is going mainstream in Western Australia -
Mirvac advertising rent-to-buy to sell apartments at
Claremont Ova (Perth).
What's interesting is how they are structuring the
Rent-to-Buy, using (you guessed it) a Lease Option. This is
how it works:
The buyers pay an up-front option fee of 2.5% of the
price for an option to purchase and enter into a two year
lease paying fortnightly rental instalments equivalent to
loan repayments. After two years they must purchase the
property with external finance. Because they are tenants,
and so do not pay Council Rates or Strata Levies and so the
rent is all they pay.
The buyers receive a full credit of the 2.5% option fee
and a full rent credit for the rent they pay. If my
arithmetic is correct, the credits will add up to about 10%
of the price (+ stamp duty), leaving 90% to be financed
Significantly, the buyers must prove their ability to pay
the fortnightly rental instalments and qualify for a
pre-approval for the mortgage finance they will need to take
out after two years to buy the property.
The apartments are priced from $495,000 for a 1 bedroom 1
9 May 2019
What is Rent to Own?
Rent to Own is a variety of vendor finance.
In Rent to Own, the seller helps the buyer by allowing the
buyer to rent the house for a while, until the buyer builds
up enough equity to qualify for a bank loan and own the
How does Rent to Own work?
Rent to Own is a two phase contract made directly
between a seller and a buyer.
The first phase is the Rent phase when the buyer
is living in the house and is making the regular payments.
The second phase is the Own phase when the buyer
has enough equity to qualify for a bank loan, which they use
to cash out the contract and transfer the house into their
What questions do buyers ask?
- How quickly can I move in?
You can move in immediately and start the rent phase
once your home application form is checked out favorably,
you pay the documentation fee, you sign the contract and
make the up-front payment.
- What do the payments go towards during the
The up-front payment goes towards building equity. The
ongoing payments are mainly rent payments, with some
going towards building equity.
- What are the payment amounts during the rent
The payment amounts are higher than the market rent
because they consist of not only rent payments, but also
the to own payments.
The to own payments go to build equity and to pay
house expenses such as Council and Water Rates and Home
How much the to own payments will be depends on
what you can afford and the time frame agreed for
- How long does the rent phase last?
The rent phase lasts until the buyer has built up enough
equity in the house to finance with a bank. Five years
is a very rough guide.
Building equity can be achieved by making regular to
own payments and by renovations.
In terms of payments, for some buyers it is to build up
10% of the pre-agreed price, for other buyers it is to
build up 20% of the pre-agreed price. Self-employed
buyers usually need to build up 20%, but if they are
handy, can build up some of that 20% with renovations.
- Can you speed up the rent phase?
Yes. You can save up extra if you receive a pay rise,
you can reduce expenses by paying off a car loan or a
personal loan, and can use the extra towards building
If you renovate wisely, by building a carport or a
pergola, by landscaping, by installing a new kitchen, by
painting, etc., then you will be able to build equity by
increasing the value of the house.
- What do you do when you reach the to own phase?
Once enough home equity has been built up, you obtain
finance from a bank. Using a mortgage broker is best.
Because the purchase price is agreed and fixed up front,
it is easy to work out how much you need to borrow. You
will need good financials and a good credit rating for a
- What happens at the to own phase?
While you are in the rent phase, you are not recorded on
the title as owner. During the rent phase, your interest
in the property can be protected under the Contract, by
living in the property and by registering a Caveat on
the title of the property.
At the to own phase, the bank loan pays out the
Contract and the title is transferred into your name.
- Where do I find a house to buy with Rent to Own?
You need to keep an eye out for signs on properties,
adverts in the local newspaper and on the internet. If
you are a tenant and the landlord is interested in
selling to you, you could ask the landlord if he or she
would consider a Rent to Own.
- What is the paperwork for a Rent to Own?
There are two different kinds of paperwork that can be
used for a Rent to Own, depending on which State in
Australia the property is in, and depending on the
seller’s tax position.
The paperwork starts with a Heads of Agreement, which
the seller and buyer complete, which is then handed to
the seller’s property lawyer for Contract preparation.
Click here for a sample
Heads of Agreement. Contact us for a more detailed
Click here for a list
of property lawyers. Use a property lawyer who practices
in the State where the property is situated.
Example of a Rent to Own
A house is ‘sold’ as a Rent to Own at a price of
The paperwork will contain these items:
- pay an up-front payment of $10,000
- move in immediately
- pay $50,000 of the price by 250 instalments of $200
per week in just under 5 years
- pay rent of $300 per week (including rates) over the
next 5 years
- at the end of 5 years, borrow $240,000 (which is 80%
of the price) and pay the outstanding amount due to the
- be able to add a carport, a pergola, landscaping, a
new kitchen to improve value and possibly refinance
- look after repairs and maintenance
What steps do I need to
take in order to buy a house with Rent to Own?
- Look on the web, on street signs, on flyers for
houses which are advertised as ‘Rent to Buy’ or ‘Rent to
Own’ or ‘Vendor Finance available’. This website is an
information website – it does not advertise Rent to Own
- Save up your up-front money – as a guide 3% of the
- Choose a Rent to Own house, contact the advertiser
and fill in their home application form.
- Consult mortgage broker to look at your financial
situation and to work out a plan to refinance with a
bank down the track when there is enough equity in the
house and your financials can support a bank loan.
- You are chosen to buy the house and pay the
documentation fee. You select a property lawyer to
advise you on the Contract.
- Complete the direct debit authority for the payments
from your bank account.
- Sign the Contract.
- Pay the up-front payment (less the documentation fee
- Collect the keys and move in.
- Look after the house, pay the payments on time, and
down the track refinance or sell.
Can an Option to Purchase be used to buy a house or a home
Buying as you are renting a house or home unit means that
a tenant holds an option to purchase their rental property.
Coupling an option to purchase with a lease has been used
in commercial leases for many years.
In a recent decision: Le v Phan  NSWSC 632,
the Supreme Court of NSW has upheld the validity of a
combined option to purchase and a residential tenancy.
We will now review the decision and the form that the
option to purchase should take when combined with a
residential lease, to make a rent to buy transaction.
What form should an Option to Purchase take in rent
to buy transaction?
Options to Purchase provide a pathway for residential
tenants and residential property investors to control a
house or home unit, initially without taking out a bank loan
or paying a traditional deposit.
Over an agreed term, the tenant or investor, can either
build up a deposit and obtain a bank loan to take title to
the property, or sell the option at a profit, or relinquish
This is the form that the rent to buy transaction
- An option to purchase (a call option) and a
residential lease are entered into at the same time.
That is why the transaction is commonly known as a
- The residential lease is entered into at market
rent, in the standard form prescribed by the Residential
- The option to purchase (a separate document)
specifies the option fee payable and how it is to be
paid, the fixed purchase price payable and the option
- The amount of the option fee payable and the option
expiry date are set by reference to the expected loan
availability at the end of the option term. For example,
if the tenant can expect to qualify for a loan of 90% of
the price, then the option term will need to be
sufficiently long for the option fees to be paid to
amount to 10% of the price. As a fall-back, often there
is provision to extend the term if the loan
qualification becomes more difficult during the term.
The term of the residential lease mirrors the option
- The option fee is paid by instalments. Part of the
option fee is paid on the entry of the option. The rest
of the option fee is paid during the term, by
instalments, usually when the rent is paid. For example,
the rent might be $400 per week and the option fee might
be $200 per week. And so, the total weekly payment might
be $600 per week. The rider is that the weekly payments
of $600 per week need to be affordable to the tenant or
investor, as if affordability was assessed under
responsible lending guidelines.
- The price is a fixed price which is set when the
option is granted.
- The price represents 'full market value' of the
property. The price will be higher than the cash price,
because payment terms are offered. How much higher
depends on prospects for capital growth and the term.
- The option to purchase can be exercised at any time.
- The title to the property remains in the name of the
owner, and the existing property loan remains in place.
If the option is exercised, then at the time when the
price is paid, the property loan is repaid.
- The tenant/buyer can protect their interest under
the Lease Option by registering a Caveat over the title
to the property.
Do the courts recognise Lease Options as valid?
In Le v Tran, Associate Justice Harrison of the
Supreme Court of New South Wales upheld a Lease Option which
took the above form.
The house was a standard 3 bedroom house. The other facts
were somewhat unusual - the option fees payable were lump
sums payable on certain dates; and the court's task was to
determine the validity of the termination of the Lease
Option, as opposed to enforcing the Lease Option.
And so the decision, which centred upon the
tenant/grantee's default, the termination of the option and
the lease, and orders for possession and payment of arrears
of rent and option fees, is not relevant for our purposes.
However, relevantly for our purposes, the court upheld
the validity of the Lease Option documentation. These were
the observations made by her Honour:
- “The option agreement provided that Ms Tran would be
granted an option to purchase the property for the price
and in accordance with the terms of the Contract for
Sale attached to the option agreement in return for an
option fee, comprised of an upfront option fee and
ongoing instalments. The option fee was to be credited
against the purchase price of the property. ... Although
the option agreement appears to be expensive, the
benefit it conferred on Ms Tran is that she had the
right to purchase the property and the payments made by
her were credited to the sale price.”
- “The residential tenancy agreement is a standard
form agreement in accordance with the Residential
Tenancies Regulation 2010 (NSW) Schedule 1 clause 4.
.... the term of the agreement is two years. The rent is
$550 per week. A rental bond of $550 was required.”
What are the legal, licensing and stamp duty issues
for Lease Options around Australia?
Lease Options are legal throughout Australia. Each State
and Territory has their own standard form Residential
Tenancy Agreement, but they are similar. Each State and
Territory has their own laws for property options, which
means that they can be considerably different.
The failure to use the standard form Residential Tenancy
Agreement and to strictly comply with the property option
laws can lead to the documents being invalid, and therefore
legally unenforceable. It is therefore essential for these
documents to be prepared by a lawyer / conveyancer.
In South Australia, the use of Lease Options is limited –
they cannot be longer than 6 months, and the option payments
are limited to 4 in number. No other State or Territory has
In Victoria, Lease Options are liable for stamp duty as
if they were a purchase, when they are entered into. No
other State or Territory imposes stamp duty on entry of a
Entering into Lease Options is a real estate activity. If
the Lease Option is for an owned property, as a one-off,
then it is unlikely to be considered a real estate business
activity – it is a private activity. But if a person engages
in Lease Options as a business, then it needs to be done
through a licensed real estate agent. Of course, the
alternative to using a real estate agent is to obtain your
own real estate licence!
Lease Options are not credit contracts. No credit is
given in a Lease Option. Paying rent is not the same as
paying interest. Therefore, an Australian Credit Licence is
Sandwich Lease Options
There is an interesting twist to this decision, which is
that the grantor of the option, Mr Le, was not the
registered owner of the property.
Mr Le had taken an option to purchase the property from
the owner, Ms Phan. Mr Le's option was to purchase the
property at a fixed price.
To pay the option fee, Mr Le agreed to pay Ms Phan's home
loan instalments, as they fell due, together the land rates
and water rates. He also paid for the home insurance.
This form of option is known as an 'Assumptive Option'.
Together with the Assumptive Option, Mr Le was given a
residential lease of the property, with the right to
He was appointed the attorney of the owner (under a Power
of Attorney) to deal with the property.
When an Assumptive Option and an Option for Purchase are
used together, they are known as a 'Sandwich Lease Option".
Of course they are accompanied by a lease and a sub-lease.
Their attraction lies in the fact that someone in Mr
Tran's position can put together a Sandwich Lease Option to
control the property without needing to expend any of their
own money - figuratively, they can 'Buy a house for $1"!
Why is no financial outlay necessary? The reason is that
payments made by the tenant/grantee of the Option to
Purchase exceed the property loan and other payments that
need to be made under the Assumptive Option.
Sandwich Lease Options are not for beginners. It is
recommended that Options to Purchase be mastered first, and
then the more difficult Assumptive Options can follow.