07 Nov Beware of ‘rent-to-buy’ schemes – Eileen Webb
Those looking to get a piece of the Australian dream of buying a home are still falling victim to a shadowy scam commonly called rent-to-buy deals. So why – if the prices are over inflated and there is no legal security over the property – are these people shelling out thousands upon thousands of dollars and more importantly is nothing being done? Great questions that we try to get answered today by Associate Professor of Law at Curtin University Eileen Webb.
Kevin: Well, here’s a timely warning for you. I read a brilliant piece that was written recently about how many Australians are still falling prey to the rent-to-buy schemes that we see plastered all over telephone poles and in the classified section of the newspapers. The article was written by Associate Professor of Law at Curtin Law School at Curtin University, Eileen Webb, who joins me.
Associate Professor, thank you very much for your time. Tell me a little bit about how these schemes work.
Prof. Webb: The easiest way to look at them or understand them is to compare them to a regular bank loan. With the standard bank loans, you have land being transferred to a purchaser upon settlement. The mortgage is noted as a charge on the title but the purchaser is acknowledged as being the owner of the land.
Now, this never happens with these fringe lending schemes. The land won’t be transferred to the purchaser until it’s paid off in full, and you allegedly pay off your home by simply paying rent for that period or until the property is refinanced.
The problem is that the so-called purchaser never actually has an interest in the land. You’re like a renter, and so if they default, the vendor can simply say, “Oh, you’re in breach of your contract.” They lose everything that they’ve paid and the opportunity to buy the house.
Kevin: Is there a record of the deal anywhere that it shows that the renter is, in fact, buying the home.
Prof. Webb: No. This is one of the big issues with this. Everything is done via contract. And again, it depends on the particular arrangement. Some are quite well documented, but as you would imagine, the contracts are all in either the vendor’s and often the broker’s favor.
The basis of the agreement is the contract, so there’s no transfer of title. Arguably, the perspective purchaser could lodge a caveat, but it seems nobody ever does, and there simply is no interest in the title.
What you could do is you could rely on that contractual right and you could try and proceed in a court, but who has the time and the energy and the money to do that? Particularly when the people who were targeted by these schemes are often challenged economically to begin with.
Kevin: Exactly. That’s the point I’ll come to in just a moment. In the article, you also say the Consumer Action Law Center has seen no examples of successful rent-to-buy deals anywhere. How can this be legal?
Prof. Webb: It’s legal because it hasn’t been made illegal. Basically, they’re operating in this twilight zone. Where the problems arise with the law is that these sorts of things are regulated, if you like, across a smorgasbord of state and national law. Within each state, you have the state government being responsible for property laws and the carriage of much of the consumer law relevant to that jurisdiction. Then you have the national credit law, so you have national laws in relation to responsible lending and the National Credit Code.
Now, what is happening is that first of all, many of these transactions are falling through the cracks. Just a quick example: many of the brokers who are involved in this area are not licensed and therefore, if they’re not licensed, they’re not being caught by the national credit laws. Similarly, other transactions just simply fall through the cracks, so they don’t fit within the particular state legislation, they don’t fit within the national legislation.
Of course, it’s inconsistent across the country because one of the joys of being in a federation is, of course, we have a lot of different state laws. In some states, the consumer protection authorities have actually been quite proactive, so I’m very happy to say in Western Australian they’ve been very proactive with going after these guys, but in other states, there isn’t as much opportunity to do so.
Kevin: How widespread is it? Do we really know?
Prof. Webb: No, we don’t, because as Consumer Action actually noted in their report there’s very little usable data because the thing is the property doesn’t change hands, you don’t pick that up, and you don’t get anything from the consumer protection agencies unless they’re following up a complaint. You don’t get anything from land titles. You don’t get anything stamp duty offices because, again, you haven’t got these things changing hands.
What we do have is evidence that legal services and consumer organizations and the consumer regulators are seeing more and more of these transactions. So I guess you’d say we have anecdotal evidence of an increase in these types of transactions.
Also, too, there is an unhealthy interest in getting involved in these schemes. People are actually encouraged to become brokers within these rent-to-buy schemes by very high-profile promotors, and they tout it, if you’d like, as a way of getting rich quick. People get attracted by this and they go into these schemes, and if even a small proportion of numbers of people who do these courses actually go out there and become brokers, that will lead to a very significant number of these transactions.
Kevin: Is it only a matter of time before this does become illegal?
Prof. Webb: One of the recommendations of Consumer Action Law Center… And I can’t speak, obviously, on behalf of Consumer Protection in Western Australian but I’m sure that given our experiences over here, they would be applauding this. Look, they really should be banned. They’re of no discernible consumer benefit. We haven’t seen any successful rent-to-buy schemes and most vendor finance schemes fall over.
The idea behind the rent-to-buy is that at the end of the rent-to-buy period, the potential purchasers refinance. They simply are not able to refinance because they’ve paid too high a price for the property, they’re in low-growth areas, so they haven’t got any equity to offer a mainstream lender, and so after the five-year period, they pretty much lose everything they’ve paid and have to walk away.
Now, the other alternative is if we strengthen regulation of these contracts. So basically, we should ensure that if these transactions are brokered by intermediators for profit – which is a fancy name for brokers, obviously – the law should be amended to make sure that the National Credit Code will apply and we don’t have these unlicensed people falling between the cracks and us not being able to prosecute them.
Also, too, what we need is that the monies that are paid by the prospective purchaser should be held securely. At the moment, it’s just going to the broker and back to the vendor or going directly to the vendor, and it can be used as that person wishes. Basically, it needs to be held securely on behalf of the buyer until such time as the property settles – which it invariably doesn’t – or that if things go wrong, the buyer can recover any amount that they’re entitled to if the deal is not completed.
Kevin: Well, it certainly is an area that needs to have some legislation to protect people, I think, because you rightly said, the people who are attracted to this are those who probably aren’t best equipped to handle it.
Prof. Webb: It’s tragic, and I think what’s going to happen, too, is that we have this perfect storm, if you like, because housing affordability is decreasing because you have increasing casualization, we have rising defaults, job losses, and so on. You have problems with people financing loans and actually being able to get mainstream loans but you also have decreasing home values, so you have vendors who are really worried about selling their own house. They’re attracted to these schemes, as well, because brokers will say them, “Well, look, we can get you more than you could selling it through the regular market.”
One thing I should emphasize is that often vendors in these situations aren’t necessarily the bad guys; the brokers in the middle are often the ones who are causing the most trouble and are causing us the most concern.
Kevin: Absolutely. We’re going to continue to look into this, as well, but I want to thank you for joining us, Eileen. Thank you very much for your time.
Prof. Webb: My pleasure. Thank you.