In this guest post for CFA, Former Consumer Action Law Centre co-CEO Carolyn Bond calls for government action in response to the serious consumer problems associated with some house “rent to buy” schemes.
“Buy My House. No Bank.”
“We Buy Your House Fast.”
You may have seen these home made signs around your neighbourhood. While there are concerns about the littering angle, there are much bigger consumer problems hiding behind these “rent to buy” deals, and these require the attention of State and Federal Governments.
The “rent to buy” model explained
Financial counsellors and consumer lawyers have seen consumer problems with “rent to buy” and “vendor terms” deals for many years. People who cannot obtain a mainstream mortgage for a home enter into an agreement to pay off a home to the seller over 25 years, paying above bank interest rates and paying over market value for the property.
Alternatively, the “buyer” enters into a tenancy agreement, but pays for an ‘option to purchase’ the property some years later at a specified sum which is well above market value. Low income ‘buyers’ can find they are unable to maintain the high payments, or are unable to obtain mainstream finance to purchase the house outright. When the deal falls over, the ‘buyer’ may have spent significant sums of money, including a government First Home Owners Grant, but finds that without their name on the title, it has all been lost. The seller may simply just resell the property to someone else on similar terms.
There are a range of variations on these models, but a more recent development involves an intermediary, who makes money by arranging contracts between a low income buyer and a seller who may be in financial trouble or desperate to sell. This intermediary may enter into a “joint venture” agreement with the seller, which entitles the intermediary to profits from the sale. When things go wrong, the intermediary can simply step aside and leave the two parties to sort out the mess. These intermediaries are often students of property guru Rick Otton, who calls them “transaction engineers”. Otton claims to teach people to control property without investing their own money.
While promoted as a “win-win solution” that helps people buy a home and others to make money, a proportion of these deals are exploitative. It’s hard to see how someone can skim $30,000 – $40,000, as claimed, off a deal struck between a seller in desperate financial circumstances and a buyer who can’t qualify for a mortgage without any party suffering detriment. While there are some very rosy examples given by promoters, cases I’ve seen suggest they often don’t add up.
The need for better regulation
Those involved in this business claim the industry is well regulated. Indeed, many of the intermediaries hold estate agents licences, as well as credit licences, however many of these deals do not clearly fit within any regulatory regime. Some of the sellers are individuals who are not selling as part of a business, which could limit the regulator’s powers, even if the intermediaries are licenced. Tenancy laws also apply in many cases, but regulators responsible for residential tenancies may only have jurisdiction over the tenancy agreement, not the related option to purchase or actual sale of land contract.
The Department of Commerce in Western Australia has been the most active regulator in this space, taking enforcement action against sellers and intermediaries, and obtaining an enforceable undertaking against Otton, who is currently unable to run seminars in WA.
However, I believe that these property transactions require much more regulatory attention, and law reform is required to ensure that regulation is not split between a range of federal and state regulators. The difficulties faced by consumers who have disputes, and the lack of more regulatory action on the key elements of these transactions, must be addressed.
Carolyn Bond is a former Chairperson of CFA and blogs on consumer issues at www.thenaysayer.net