County Mayo, just like all counties, has its fair share of newly constructed houses unsold. The builders who built them are under financial pressure. Despite this there are many young people who would like to buy a new home but cannot for various reasons: Non availability of finance, fear of job loss, no deposit saved, waiting to see if prices will fall further.
Young people are understandably cautious in the current turbulent economic climate about making one of the biggest investment decisions of their life – buying their first home.
The builder may have already dropped his asking price, offered sweeteners in one form or another, but the buyers are still slow to buy.
There is a solution, although not fully tried and tested, which might break the current impasse – a Rent to Buy Scheme.
How does it work - well, you need a buyer who wants to buy a house but for any or all of the above reasons cannot commit to a legally binding contract for sale in the short term. What the builder can offer is an option to buy the house in the future but with the benefit of immediate occupation.
The builder signs a written option agreement with the buyer whereby he agrees to grant the buyer an option to buy the house at a fixed price within say one, two, or three years, depending on the individual circumstances. Coupled with this option agreement, both parties sign a separate agreement whereby the builder allows the buyer into occupation of the house on payment of a monthly fee/instalment equal to the going rent for the particular house.
If at the end of the option period the buyer decides to buy, all the monthly payments he has made are credited towards the agreed fixed sale price equalling approximately 10 to 20 per cent, depending on the length of the option term. At that stage the buyer completes the purchase on foot of a standard agreed contract for sale/building agreement. The buyer will have the right to buy the house at any stage during the option period.
If the buyer decides not to go ahead with the purchase he vacates the house and the builder retains all the payments made.
The advantages of this scheme for the buyer are that he has a written agreement to purchase the house at a fixed price over the term of the option period. The option agreement is legally binding on the builder for that period. There is no penalty if the buyer decides not to proceed with the purchase as he would have been paying rent in any event for accommodation during the option period.
The option gives him time to save for a deposit. Secondly, he has no better way of finding out if he really likes the house or the neighbourhood than by living in it.
Finally, the buyer will also have the satisfaction of knowing that his monthly payment is not dead rental money and that he is potentially paying for his first house.
The advantage for the builder is that he now has a monthly income from the house which should ease banking pressures, the housing estate has a lived in feel which encourages more buyers, the buyer has a financial incentive to complete the purchase at the end of the option period rather than walking away and losing the benefit of all those monthly payments.
A disadvantage for the builder is that the buyer can walk away from the option agreement and vacate the house at any stage of the option period but the builder cannot. Once the builder grants an option to someone to buy the property he is tied to that option agreement for the period agreed. During that period he cannot agree to sell the property to anyone else nor can he change the terms and conditions of the option agreement.
It would, however, be reasonable for the builder to include in the option agreement a condition whereby he would be entitled to terminate the agreement if, for example, the buyer damaged the house or didn’t keep up the monthly payments. Depending on his financial situation and whether a bank has a legal charge registered over the property he may need his bank’s approval before entering into an option agreement.
Each situation is different and each option agreement will require its own special terms and conditions. The builder’s solicitor will need to furnish to the buyer clear evidence of title, compliance with all planning requirements, and generally be in a position to provide to the buyer the same legal documentation that would have to be furnished if he were entering into an immediate contract for sale.
It is advisable to get tax and legal advice before signing an option agreement.
This Rent to Buy solution may not be a magic bullet but in the current economic climate, although not long on the market, it is definitely worth considering.
Anne Clancy is a property solicitor with Douglas Kelly & Son, Swinford, Co Mayo, e-mail [email protected], telephone 094 925 1121.
