Rent to buy type deal from a family member

T

TOB76

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Hi,
I am looking for some advice on an offer from a close family member to rent out a house from them with a view to buying in say 5 years time.
The house is in a good location and we would be interested in living here as our home (married with one child at the moment).

The house was inherited and my relative is not in a hurry to sell as they have about 8 years to go to retire but they would like to see a family member living in it. They have offered us a deal to rent the property for 420pm for 5 years from them and that this money (~25k) could be taken off the price. It would also allow us to save a deposit of same amount and to see how we would manage a mortgage of roughly 1000pm.

The property was valued at 325k 3 months ago (when it was inherited) and I think this is a fair value but its difficult to know obviously when it hasnt been placed on the open market. We have been offered the property for 300k.
Would it be silly to lock ourselves into a price now for 5 years down the line?

I've been thinking that from our point of view it is like we are borrowing 300k but for the first 5 years this is interest free. We will have the benefit of living in the house and making changes to it such as decor etc.

From my relatives point of view they will have a guaranteed income for 5 years from it and it will not be a burden on them in terms of mowing lawns, airing it etc.

I think that there are a lot of pitfalls that I want to be sure to think this through fully. I'm sure I've forgotten to give lots of information for people to help so if there is anything further I'll try my best to answer.
What do you think?
Tks
 
You should not agree to lock yourself in to buying the house. There is no guarantee the house will be worth anywhere near that, and the bank might refuse to give you a mortgage. Why would you pay rent for 5 years then pay the purchase price, when you could just get a mortgage now and repay it for the next 5 years?

Rent to buy is basically an option. You agree to rent for a certain period and then have the option to buy the house. If house prices fall significantly you simply walk away. This is the risk - because you paid rent for 5 years and have nothing to show for it.

However, the seller MUST sell you the house if you want it. In that respect, a rent to buy agreement would work out in your favour given the term involved. If the house went up €50k over the 5 years, you buy. If it doesn't, you can make a lower offer. The problem is you are dealing with family here. If you don't buy will your family member fell hard done by?
 
Yes, I think it would be better if they agree that we would not be locked into buying in 5 years, as you say we may not even get a mortgage at that stage. The only positive is that we would be able to show a savings of 5 years to accumulate our deposit. Will think about this a bit further. Am writing out all the pros and cons as best I can on both sides. We have said that we'll put things in writing because its difficult with family situations as I've seen on numerous threads.
The advantage to renting for 5 years would be that our rent is paying down the capital and is interest free I suppose. I know we are buying at a price today but the mortgage would not need to be raised for 5 years
 
You are getting an extraordinary deal and you should take it, if you can afford a mortgage of €275k in 5 years' time.

You are getting a house rent free for 5 years.

You are getting it at today's price but don't have to pay for it for 5 years.

You are getting it at a discount of €25k off the current value - but do check this out.

Having the option to buy but not the obligation would be a huge advantage, and extraordinarily generous of your relative. Depending on the situation - don't be too greedy. Without this it's really a great deal anyway.

No one can predict the future direction of house prices. They might be higher after 5 years, or they might be lower.

You should check out the structure of the payments as the way you are doing it is not very tax effective. Your relative will have to pay tax on the rent. You might be better off simply buying the house now and deferring payment for 5 years. If you are a first time buyer, you won't be paying any stamp duty.

The downside of buying it now, is that if you can't pay for it in 5 years, then you will have to sell it and buy a new property on which you will have lost the stamp duty exemption.
 
what ever u decide . get a solicitor involved and get a legal agreement in place . nothing pulls a family apart like money
 
Thank you so much for the replies. I think we would need to get a solicitor involved with the possible complications alright.
We are very grateful to be given this option, it means we will hopefully be in a better position in terms of childcare costs also as we will have our first in school and we hope to have another in the near future. It is great to get other peoples opinions on it.
I will check out the tax side of things also, thanks again, food for thought.
 
It does not say where the house is but €420 a month seems a very small price to pay for rent. If worst comes to worst and the agreement to buy falls through, you will at least have had a very cheap house to live in for 5 years. That should help you gather enough funds to buy another place when the time comes around. I agree with other posters though. Make sure the agreement is signed and sealed to avoid possibly falling out with your family down the road. Your family should also look at what they are offering. They will pay tax on the rent that you pay them and they are giving you the full amount as a deduction from the price of the house. A tax expert would probably be able to find a tax efficient way of doing this deal.
 
You should also clarify who pays for the house maintenance while it is being rented.
Whatif the central heating breaks down and there is a €1000 bill to fix it.
Who pays ?

In a normal situation, the landlord pays, but will your landlord think that with your very low rent and the fact that you are supposed to be buying the house that this would be your responsibility.

It is worth thinking about about the negative things that could happen and clear them up now. As was said by a few posters, it would not be worth any money to you if you end up in a nasty row with family.
 
This sounds like a great deal if, as Brendan points out, you have the option to buy rather than the obligation. As Brendan quite rightly points out, no-one knows where prices might be in 5 years - but you must assess the likely direction and the consequences for you. If the house is worth less in 5 years, how much are you prepared to pay to make up the difference between what the bank will offer and what you'll need to pay in full. Will you be obligated to do so?
 
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