Rent-to-own is emerging as a new path to home ownership, but is it worth it?

Many renters would be nervous about putting a nail in the wall, let alone a backyard pool.

But Andrew Robertson has not signed any ordinary contract.

“We bought the house, but we didn’t buy the house,” Robertson said.

The Gold Coast dad has struck a rent-to-own deal, which means if all goes according to plan, he’ll one day own his home.

If he had gone to a bank, Mr. Robertson would have needed a deposit of about $150,000 to buy the house in Pacific Pines.

Instead, he paid around $36,000 to one of two rent-to-own companies that launched in Queensland last year.

“It’s been fantastic for us,” he said.

“Trying to save and rent at the same time, the way the real estate market keeps going up, it’s pretty hard to keep track of where you need to go.

“We would have targeted a certain amount of deposit for a certain property, but by the time we got there, the deposit required for that property would be higher again.”

Andrew Robertson standing in front of his house.
Robertson said it was difficult for her to save while renting before she entered the program.(ABC News: Steve Keen)

An academic warns that the rent-to-own model, heralded as “the new path to home ownership,” is risky because prices are fixed regardless of how the market behaves.

“Buyers need to be very aware of what they are signing up for,” said Professor Shaun Bond of the University of Queensland business school.

How do lease contracts with option to purchase work?

As the name suggests, you rent a house with the option to eventually buy it.

The companies buy the property and the client pays them a lower deposit than usual.

In Mr. Robertson’s case, the initial fee was 3 percent of the agreed value of the house.

The customer then pays an ongoing fee, a bit like rent, but also covers utilities. Some of that fee is saved as home equity.

Once sufficient equity is built up, the client obtains a regular mortgage loan and title is transferred to them.

OwnHome co-founder James Bowe said the model is designed to allow people to save for their home while living in it.

“What you’re doing is locking in the price at which you can buy that property back,” Bowe said.

James Bowe standing in front of a pink wall.
James Bowe, co-founder of the rent-to-own company OwnHome.(Supplied)

Dean Arnold, the founder of PublicSquare, said the deal was like a “forced savings mechanism” that would help buyers get into their own homes “up to 10 years earlier.”

“We like to see our clients accumulate at least 2.5 percent annually in equity, which means by year four they have 10 percent equity ready and can access a traditional mortgage,” Arnold said.

What’s the trick?

If the property market falls, you could end up paying more for the house than it’s worth, Professor Bond warned.

According to the contract, the agreed price of the property increases every year: with OwnHome, by 3.8 percent per year.

“Prices are actually starting to fall again, so buyers need to be very mindful of locking in further price increases when we have clearly passed the peak,” said Professor Bond.

But Bowe said that historically prices have always risen in the long run.

“We certainly don’t have a crystal ball on how housing markets will develop,” he said.

“What we’ve seen over the last century is that there has never been a seven- or 10-year period where house prices ended up lower than at the beginning of that seven- or 10-year period.”

Arnold admitted that a recession, or an increase of less than 3 percent a year, would be a “financial inconvenience” for clients.

However, he said his company’s clients were in it for the long haul.

Dean Arnold standing with his arms crossed.
Dean Arnold, founder and CEO of leasing company PublicSquare.(ABC News: Lucas Hill)

“They’re not really thinking about what the market is going to do for three or four years,” he said.

“They are thinking that I am going to live in this house for 10 to 20 years.

“Historically it’s been a pretty safe bet that the market will go above three percent [per year] what we charge”.

Robertson said that based on historical prices in his suburb, he wasn’t “overly concerned” about falling prices.

“But it’s obviously in the back of your mind,” he said.

How do the payments compare to regular rent?

“They’re a little taller,” Arnold said.

“But imagine if you really want to build a warehouse of $100,000 or more 10 years from now, you’re going to have to save hundreds of dollars a week on top of rent.”

Robertson said his ongoing “rent-to-own” payments were less than the rent he was previously paying.

“For us in that sense, it’s no different financially, except this time we’re going into our own house instead of someone else’s mortgage,” he said.

Bowe said his company’s ongoing charges included water fees, municipal fees, maintenance and repairs.

“We’re taking care of all the things you would normally expect the owner to take care of,” he said.

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