Rent to Buy- is this concept legal in the UK

budgetflyer

I came across the following (on ebay of all places).
Is this legal in the UK?
Would a similar scheme help first time buyers toiling to get a foot on the property ladder?

http://cgi.ebay.com/ws/eBayISAPI.dll?ViewItem&category=12605&item=4367661271&rd=1&ssPageName=WDVW

Its quite a long advert but on second reading it became quite clear.
you put a deposit on a house,the purchase price locked in, in this case at about 35% over current value .
You then rent it for 5 years with around 20% of your rent going to reduce your locked in purchase price. After 5 years your deposit+credits are discounted against the locked in price.
The concept being that the actual value will have risen much more than the locked in price and you should hopefully be able to mortgage it through a regular lender as the LTV % will be much lower.

sounds interesting in principle provided the deposit and credits are ringfenced.

Any thoughts,comments?

Pal

Well that is a great idea! Buy an overpriced house at 35% over the current market value! Lock in 12.5% property price inflation for the benefit of the person SELLING the property!

I can't believe that people have been stupid enough to make bids on that auction.

Avoid.

BoltonMinx

People buy houses on ebay ? Wow, its so full of scammers I dont even bother now

budgetflyer

Pal wrote:

Well that is a great idea! Buy an overpriced house at 35% over the current market value! Lock in 12.5% property price inflation for the benefit of the person SELLING the property!

I can't believe that people have been stupid enough to make bids on that auction.

Avoid.

It was the concept.This is quite a high priced example.
As is obvious from many posts on this board,the hardest part for many young people is actually getting on the property ladder in order to get some equity in order to trade up.The figures in the auction wouldn't buy much in London or the SE (remember its $s not £s).Renting only pays the landlords mortgage, he/she would benefit from house price inflation anyway.The benefit for the renter is that by locking in at 12.5% they can guarantee the fixed price. If prices drop, they can walk away after 5 or 10 years without committing to a mortgage and all they have lost is their initial deposit and credits.If prices outstrip 12% PA then the price is locked in so they may have a bargain on their hands as hopefully they will be in a position to get a mortgage by then.

The house is valued at $350000. If a lender was willing to accept a $25K deposit then mortgage payments @ 6.5% would be $2390 PM for 20 years.

$25K deposit with the rent to buy scheme would guarantee a rental of $2K PM, $370 of which is adding to equity. This would allow the renter to save another $390 a month +$370 to eventually buy the place if desired.If interest rates doubled then the renter would be quids in in the short term ,if they drop then hopefully this would fuel house price inflation which would again benefit the renter/future purchaser.

For this to work,ringfencing of the deposit and credits would be a must to protect the buyer until he/she decides to complete the sale or walk away.

BTW most of the bidders have either no or very little feedback. They may be bidding for fun. Many of these deals are completed "off ebay".

Pal

So, given that we are either at or just past a massive property boom and are now looking at a long period of either flat or falling house prices, you think it is entirely sensible for a first time buyer to buy a property at a price that guarantees the seller a 12% per annum profit for the next 5 years.

The only way the buyer can "profit" is if house prices go up by more than 12% a year for 5 years! How likely is that to happen?

What is wrong with simply buying at the current market price, using a 100% mortgage is necessary? You say that many first time buyers can't afford to buy, but you suggest that they might have a $25k deposit lying around?

If the buyer can't afford to spend $350k on a house now, how are they going to be able to afford to pay over $500k in 5 years time? Even taking off the amounts they have already paid, they would still need some massive payrises to be able to raise the finance.

It is an idiotic idea designed to scam first time buyers.

budgetflyer

That property boom has happened as we speak. Similar 5 bed houses are going for $450K+.If I was to be sarcastic then we are talking 20% rise in 4 days :-)
I dont think the seller is ripping anyone off. He wants to guarantee a profit on his investment and is very clear on the terms.
It is not aimed at people who can get 100% mortgage on $350K, its aimed at people who have a smallish deposit and maybe cant get normal credit facilities from a bank.
Outside the "perfect world" there are many people who earn a lot of money that cant get good rates due to failed businesses,dont meet normal lending criteria etc. They are renting now,waiting to get their credit rating back to normal.This way they could lock in a price they know they could afford in 5/10 years time.
Bear in mind property tax and building insurance on this house would be at least $5500 PA. The Landlord pays that.
I estimate savings on mortgage,propert tax ,insurance +£25K deposit + $65K credits, in 10 years the house will have under 400K outstanding on it. If its not worth a million by then the whole of the USA will be down the pan anyway.
You have to think outside the safe ,normal parameters.Inovative solutions to complex problems.Owner financining is common in the USA. You can buy a house regardless of your credit history.Dont pay, they take it off you, pay and its yours after a set period.
Compare that to here, cant get a mortgage- confined to either renting via council or paying thru the nose for a private let.

Pal

SO you are suggesting that people who cannot get credit for some reason should agree to pay 12% interest on a very large mortgage just in order to buy a house that is already overpriced? Owner financing is entirely reasonable, but waiting for a few years and then getting a commercial mortgage at about 4-5% would be a much better idea, especially given that the US is experiencing exactly the same housing bubble that we are.

Not, by any chance, advertising your own e-bay auction?

budgetflyer

What a cynic. IF ONLY I WAS. The guys a power seller .Its well out my price range anyway.
I must admit I did sell a bit on ebay a while back I stopped over a year a go, it took up too much time.
If you have any doubts about my integrity you could always check my 100% positive feedback (180)

http://feedback.ebay.co.uk/ws/eBayISAPI.dll?ViewFeedback&userid=budgetflyer&ssPageName=STRK:ME:UFS

Pal

My humble apologies for being unnecessarily cynical.

budgetflyer

De Nada.:beer:
It maybe wasnt the best example given the negative vibes in the property market at the moment.
However what I have learned (never stop learning) is that these owner financing deals are quite common in the USA. Mostly @ "Prime rate" interest rates or there abouts.
For many people who maybe do'nt qualify for regular mortgages due to maybe past history etc , its a way of owning their home.
That particular example maybe wasn't the best , but the theory is good in MO

EdInvestor

"Vendor financing" does exist in the UK but usually only in the context of property the lenders won't look at AFAIK, such as freehold flats.